Project Appraisal or Project Analysis

- 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.

Nice work. Thanks for sharing it!
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