APPRAISAL

Appraisal is the analysis of a proposed project to determine its merit and acceptability
in accordance with established criteria. This is the final step before a project is agreed for
financing. It checks that the project is feasible against the situation on the ground that the
objectives set remain appropriate and that costs are reasonable.

PROJECT APPRAISAL

Project Appraisal is the analysis of costs and benefits of a proposed

project with a goal of assuring a rational allocation of limited financial resources amongst
alternate investment opportunities with the objective of achieving specific goals. Project
Appraisal is mainly the process of transmitting information accumulated through feasibility
studies into a comprehensive form in order to enable the decision maker undertake a
comprehensive appraisal of various projects and embark on a specific project or projects by
allocating resources.

Project appraisal is a generic term that refers to the process of assessing, in a

structured way, the case for proceeding with a proposal. It is the process of assessing and
questioning proposals before resources are committed. It evaluates a project’s ability to meet
its stated objectives and to provide long term Economic growth in the larger framework of
local and National needs.

The project appraisal process is an essential tool in regeneration and neighbourhood

renewal. An effective project appraisal offers significant benefits to partnerships and, most
importantly, to local communities. A good appraisal justifies spending money on a project.
It is an important tool in decision making and lays the foundation for delivery and evaluation.

The evaluation of industrial projects in terms of alternative variants in technology, raw

materials, production capacity and location of plant is known as ‘Project Appraisal’. A
lending financial institution makes an independent and objective assessment of various
aspects of an investment proposition.
IMPORTANCE OF PROJECT APPRAISAL

• It helps in arriving at specific and predicted results.

• It evaluates the desirability of the project.

• It provides information to determine the success or failure of a project.

• It employs existing norms to predict the rate of success or failure of the project.

• It verifies the hypothesis framed for the project.

ASPECTS OF PROJECT APPRAISAL

• Economic Aspects

• Technical Aspects

• Organizational Aspects

• Managerial Aspects

• Financial Aspects

• Market Aspects

• Environmental aspects

ECONOMIC APPRAISAL

Economic appraisal of a project deals with the impact of the project on economic
aggregates. Economy – ensuring that the resources used in best way. Economic appraisal of a
project deals with the impact of the project on economic aggregates. These may be classified
under two broad categories.

• The first deals with the effect of the project on employment and foreign exchange

• The second deals with the impact of the project on net social benefits or welfare.

Analyses the project and it will justify the project cost/investment

• Social cost -benefit analysis

Cost Benefit Analysis (CBA) is used for determining the attractiveness of a

proposed investment in terms of the welfare of society as a whole.
 • Direct economic benefits and costs in terms of shadow prices

• Impact of project on distribution of income in society

• Impact on level of savings and investments in society

• Impact on fulfillment of national goals :-

(1) Self sufficiency

(2) Employment and

(3) Social order

KEY ELEMENTS FOR ECONOMICAL ASPECTS

• Cost effectiveness

• Financial international rate of return

• Economic international rate of return

• Pay-back period, etc

TECHNICAL APPRAISAL

Technical appraisal is primarily concerned with the project concept in terms of

technology, design, scope and content of the plant, as well as inputs are infrastructure
facilities envisaged for the project. Basically, the project should be able to deliver a
marketable product for the resources deployed, at a cost which would leave a margin that
would be adequate to service the investment, and also plough back a reasonable amount into
the project to enable the enterprise to consolidate its positions.

• Site and Location: RM supply, proximity to markets, transportation facility, power

supply, manpower, water, government policies, labor laws, climate, taxes

• Size of plant/scale of operations: Technological capacity is standardized for

achieving economies of scale, low demand or less resource availability result in
economies of scale
 • Technical feasibility: Technology selected, availability of infrastructure, plant layout,
project implementation schedules etc

KEY ELEMENTS FOR TECHNICAL ASPECTS

Technology and Design

• Project Definition

• Viability and performance

• Adaptation to technical progress

• Local-specific requirements

• Appropriate technical capacity

• Life expectancy

ORGANIZATIONAL ASPECTS

Organization structure, recruitment and training aspects are studies. Appraisal done to see
if project is adequately staffed, initial recruitment is done.

The proposed organization must have the basic principles to be followed include:

• There must be clear lines of authority running from top to bottom of the
organization and the chain of command should be clear.

• The responsibilities of each authority should be clearly defined in writing.

• The decision making power should be placed as near as possible to the scene
of action.

• The number of levels of authority should be kept at minimum.

• The organization should be kept as simple as possible and should be flexible to

adjust to changing Conditions.

MANAGERIAL ASPECTS
 The main task of management is to implement the project objectives within the
framework of organizational structure. For good management, a clear definition of functions
and activities are required. There is also a need for allocating responsibilities to various
agencies for various project activities. A suitable mechanism for coordination of the activities
of participating agencies should also be developed. Besides, proper staffing also comes under
the purview of the management.

• Financial institutions check if promoters are competent and have business sense

• They can appoint nominee directors on board

• The Companies Act and Industries Act empower government to exercise control over
management

• They can also take over the management in case it is needed

FINANCIAL APPRAISAL

Financial appraisal involves assessing the feasibility of a new proposal for setting up a
new project or the expansion of existing production facilities. Financial appraisal is
undertaken through an analysis which takes into account the financial features of a project,
including sources of financing. Financial analysis helps trace the smooth operation of the
project over its entire life cycle.

Decisions about undertaking any project depend a lot on financial analysis of a

project. As there could be many beneficiaries participating agencies of any project, there is a
need for separate financial analysis each.

KEY ELEMENTS FOR FINANACIAL ASPECTS

• Cost analysis: Finding out the cost of production

• Pricing: Deciding price of the product after considering demand, profit and
competition

• Financing: Raising funds and efficient use of the same

• Income and Expenditure: Concerned with predicting profit and costs involved

• Risk overview.
 • Return overview.

MARKET ASPECTS

The commercial aspects of a project involves the arrangements of marketing the

output produced by the project and ensuring supply of inputs needed for the project to
operate. There is a need to assess the effective demand of the project output and the prices
that may prevail under the demand and supply situations. The analyst also needs to cautiously
evaluate the impact of product supply on the price of the product and the viability of the
project under such changed price situation.

STEPS FOR MARKET ASPECTS

• Analysis of market opportunities

• Specification of marketing objectives

• Planning and organizing of marketing process

• Controlling of implementation of marketing plan

KEY ELEMENTS FOR MARKET ASPECTS

• Demand pattern

• Degree of competition

• Tariff level and structure

• Product quality

• Potential of the market.

• Share in the market.

ENVIRONMENTAL ASPECTS
 Environmental appraisal concerns with the impact of environment on the project. The
factors include the water, air, land, sound, geographical location etc.

• Cultural acceptability and compatibility with needs of intended beneficiaries

• Social strategy and sustain beneficiaries’ participation

• Integration of environmental issues in the activity to enhance benefits