Ecu 401 L9 Project Appraisal

L9 PROJECT APPRAISAL
Lecture Objectives:
By the end of this lecture, the student should be able to:
i) Define the term project appraisal.
ii) Explain the importance of project appraisal.
iii) Outline the components of project appraisal
iv) Discuss the various types of feasibility studies to be carried out during
project appraisal.
Introduction
Project appraisal is a process of detailed examination of several aspects of a given project

before recommending the same. The institution that is going to fund the project has to satisfy
itself before providing financial assistance for the project. It has to ensure that the investment
on the proposed project will generate sufficient returns on the investments made.
Components of Project Appraisal
The various aspects of project appraisal include the following:
Technical Appraisal
Technical appraisal broadly involves a critical study of the following aspects:
a) Scale of operations
Scale of operation is signified by the size of the plant. The plant size mainly depends
on the market for the output of the project.
b) Selections of process/technology:
The choice of technology depends on the number/ types available and also on the
quality and quantity of products proposed to be manufactured.
c) Raw materials
Products can be manufacture using alternative raw materials and with alternative
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process. The process of manufacture may sometimes vary with the raw materials
chosen.
d) Technical know-how
When the technical know-how for the project is provided by expert consultants, it
must be ascertained whether the consultants has the requisite knowledge and
experience and whether he has already executed similar projects successfully, care
should be taken to avoid self- styled, inexperienced consultants.
e) Product mix
Consumers differ in their needs and preferences. Hence variations in size and quality
of products are necessary to satisfy the varying needs and preferences of customers. In
order to enable the project to produce goods of varying size nature and quality as per
requirements of the customers, the production facilities should be planned with an
element of flexibility. Such flexibility in the production facilities will help the
organization to change the product mix as per customer requirements, which is very
essential for the survival and growth of any organization.
f) Selection and procurements of plant a machinery:
When selecting plant machinery several factors need to be considered they include
output planned, machine hours required for each operation, machine capacity,
machine available in the market etc plant and machinery form the backbone of any
industry the quality of output depends upon the quality of machinery used in
processing the raw materials.
g) Plant layout:
This is the arrangement of various production facilities within the production area,
plant layout should be so arranged as to ensure steady flow of production and
minimizes the overall cost. Some of the consideration include: future expansions,
supervision
required, inspection, safety requirements etc.
h) Location of projects:
Several factors need to be considered in choosing the location of project they include:
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-regional factors
– raw materials,
-proximity to market,
-availability of labor,
-availability of supporting industries
-availability of infrastructure facilities,
-climatic factors etc.
i) Project scheduling:
This is the arrangement of activities of the project in the order of time in which they
are to be performed.
Commercial Appraisal
This concerned with the market for the product /service. Commercial appraisal
(or market appraisal of a project) is done by studying the commercial successfulness

of the product/service offered by the project from the following angles:
 Demand for the product

 Supply position for the product
 Distribution channels
 Pricing of the product
 Government policies
Economic Appraisal
Economic appraisal measures the effect of the project on the whole economy. In the overall
interest of the country, the limited stocks of capital and foreign exchange should be put into
the best possible use, hence policy makers are concerned as to where the scarce resources can
be directed to maximize economic growth of the country, the policy makers make a choice
based on economic return.
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Financial Appraisal
This includes appraising the project using the financial tools which include but not limited to
the following:
Discounted cash flow techniques:
 Net present value methods

 Internal Rate of return
 Profitability index methods
 Benefit cost ratio method
Non-discounted cash flow techniques:
 Payback period method

 Accounting rate of return method
Management Appraisal
Management is the most important factor that can either make a project a successful or a
failure. A good project at the hands of poor management may fail while not-so-good project
at the hands of an effective management may succeed. Banks and financial institutions that
lend money for financing project lay more emphasis on management appraisal.
Lending institution looks at two points before committing their funds to project financing.
a) Capacity of project to repay the loan along with the interest within stipulated period of
time.
b) Willingness of the borrower to repay the loan While the capacity to repay is assessed by
technical, commercial and financial appraisals, the willingness to repay is assessed by way of
management appraisal.
Other appraisal techniques are quantitative and objective in nature, management appraisal is
purely qualitative and subjective in nature.
Integrity, foresightedness, leadership qualities, inter-personal relationship, technical and

financial skills, commitment, perseverance etc. are some of the parameters that needs to be
studied in management appraisal.
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The following are some of the factors that will reflect the managerial capabilities of person
concerned:
 Industrial relations prevailing in that enterprise

 Morale of employees, the prevailing superior-subordinate r-ship
 Labour turnover
 Labour unrest
 Productivity of employees etc.
Social Cost Benefit Analysis
There are some projects that may not offer attractive returns as far as commercial profitability
is concerned. But still such projects are still undertaken since they have social implications
e.g. Roads, Railway, Bridge, Irrigation, power projects e.t.c
The objectives of socio-cost benefit analysis include:
 Contribution of the project to the GDP (Gross domestic product) of the

economy.
 Contribution of the project to improve the benefit to the poorer section of
the society and reduces the regional imbalances in growth and development.
 Justification of the use of scarce resources of the economy by the project.
 Contribution of the project in protecting/improving the environmental conditions.
Ecological Analysis
In recent years, environmental concerns have assumed great deal of significance and rightly
so. Ecological analysis should be done particularly for major projects which have significant
ecological implications (like power plants and irrigation schemes) and environment-polluting
industries (like bulk drugs, chemicals, and leather processing). The key questions raised in
ecological analysis are:
 What is the likely damage caused by the project to the environment?

 What is the cost of restoration measures required to ensure that the same to the
environment is contained within acceptable limits?
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L9 PROJECT APPRAISAL

By the end of this lecture, the student should be able to:

i) Define the term project appraisal.

ii) Explain the importance of project appraisal.

iii) Outline the components of project appraisal

Project appraisal is a process of detailed examination of several aspects of a given project

Components of Project Appraisal

The various aspects of project appraisal include the following:

Technical appraisal broadly involves a critical study of the following aspects:

f) Selection and procurements of plant a machinery:

required, inspection, safety requirements etc.

-availability of supporting industries

-availability of infrastructure facilities,

-climatic factors etc.

(or market appraisal of a project) is done by studying the commercial successfulness

 Demand for the product

Discounted cash flow techniques:

 Net present value methods

Non-discounted cash flow techniques:

 Payback period method

Integrity, foresightedness, leadership qualities, inter-personal relationship, technical and

 Industrial relations prevailing in that enterprise

Social Cost Benefit Analysis

The objectives of socio-cost benefit analysis include:

 Contribution of the project to the GDP (Gross domestic product) of the

 What is the likely damage caused by the project to the environment?

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