Project Appraisal or Project Analysis

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- Project Appraisal or Project Analysis
* What (Definition).
Appraising a project means performing a process of reviewing evaluating the project and its content for feasibility and cost-effectiveness to approve or reject the project concept, through analyzing the problem or need to be solved by the project and identifying the best possible solution to be implemented. It involves an analyst in identifying stakeholders and creating a decision package for making the final decision on project approval or rejection.
• Why (Purpose).
The purpose is to analyze the proposed project to determine whether the concept really offers an effective solution that addresses the identified problem. It serves as a tool to reach project approval and step towards further project planning and development. It aims to confirm that the proposed project is technically, financially and economically feasible and cost-effective.
• When (Phase).
The appraising process is carried out during the pre-planning or initiation phase. It comes before the planning phase to confirm that the project is justified in terms of cost, benefits, feasibility and effectiveness. Sometimes in some project environments, Appraisal is regarded as a single phase that aims at initiating a project and developing a foundation for the planning process.
the tools used for project appraisal are:
1. Cost benefit analysis
2. Capital budgeting techniques
3. Financial analysis


cost benefit analysis: Cost benefit analysis is a systematic process for calculating and comparing the estimated cost of undertaking a project and the estimated value and benefits which may arise from the operation of such a project.
A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn out. Although a cost benefit analysis can be used for almost anything, it is most commonly done on financial questions. Since the cost benefit analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result, it is also known as running the numbers.
A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real trick to doing a cost benefit analysis well is making sure you include all the costs and all the benefits and properly quantify them.
Should we hire an additional sales person or assign overtime? Is it a good idea to purchase the new stamping machine? Will we be better off putting our free cash flow into securities rather than investing in additional capital equipment? Each of these questions can be answered by doing a proper cost benefit analysis.

 While analyzing cost and benefit, whether or not the project is in agreement with national policy, whether or not the project fulfills the basic needs of the people, whether or not the project coordinate with the national development plan, what are the direct and indirect impacts of the project on environment, who are to get benefit from the project, who are to get harmed from the project, what effect can have the project on national and foreign trade, whether or not the project helps the economic and social developments of the country or region, what are the minimum requirements for the local people to participate in the project etc should be studied in detail

Capital budgeting technique: capital budgeting techniques is the planning process used to determine whether an organization's long term investments such as new machinery, replacement machinery, new plans , new products and
 research development projects are worth pursuing . It is budget for major capital, or investment expenditures.  These techniques are used to make capital investment decisions. The key criterion of investment in private projects is profitability or ability of the project to earn net profit for investors. The various technique available are

1. Payback period:  It measure the expected number of years required to recover the initial investment
2. Net present value: Net present value(NPV) is difference between total present value and net cash outlay. if NPV of project is positive than it should be accepted and vice versa
3. Internal rate of return:  IRR is that discount rate at which the total present value  of cash inflows of a project becomes equal to the net cash outlay(NCO). if IRR of the project is greater than cost of capital then the project is accepted and vice versa
4. Average rate of return:  It is the average net income divided by initial investment. It doesn’t consist the time value of money. Also it consider net income instead of cash flow.If calculated ARR is greater than target ARR that the project should be accepted
Financial Analysis of Development project: A development project is a public project. It is sponsored or funded by a government, donors or foreign aid. The financial analysis of a development project is concerned with its financial sustainability. In project appraisal, the financial analysis focuses on:

1. Capital requirements: The funding requirements of the project are assessed.
2. Sources of funds: the reliability of the sources of funds to finance the development project is assessed.
3. Cash flow: the projected cash flow is examined to assess the project's capacity to meet financial obligations
4. Accounting and reporting system; the adequacy of the accounting and reporting system is assessed .
5. Profitability: Revenue and expenditure forecasts are examined to assess the project's profitability.

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