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Project Planning - 1

Presented by

M. A. Kamal, Ph.DDirector General

National Academy for Planning & Development

Lecture-4

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Outlines:

1. Introduction 2. Objectives of Project Appraisal 3. Scope of Project Appraisal 4. Methods of Calculating Profit Worthiness5. Formula for 6. Acceptability Criteria 7. The basic Difference between Financial

Appraisal & Economic Appraisal 8. Types of Project Appraisal 9. Conclusion.

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1.1 Project Appraisal: Pre-Investment Analysis/Ex-ante

Analysis.

1.2 Project Evaluation: Post-Implementation Analysis/ Ex-post Analysis.

1. Introduction:

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Project Appraisal1.3 Project Appraisal involves comparison

of costs and benefits. If benefits exceeds costs, the project could be considered for acceptance.

1.4 The basic principle in appraisal / CBA is for potential acceptance of a project.

1.5 Project Appraisal means a pre-investment analysis of a project to determine whether the project should be implemented or not.

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2. Objectives of Project Appraisal

2.1 Project Appraisal is necessitated because resources or means are Limited as compared to the needs of the society.

2.2 As a result, any investment undertaken implies depriving other projects resources.

2.3 Each project is appraised before investment decision so that scarce resources are utilized in the best possible ways.

2.4 Before allocation of resources for a particular project, the decision making authority must convince itself that the proposed project is the best and most economical way of achieving the desired objective (socio-economic benefits).

2.5 For ensuring economic use of resources we have to appraise each project very minutely from different angles.

(Cont.)

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2.6 Project Appraisal involves detailed pre-investment analysis of market & technical feasibility, financial soundness, economic desirability and, finally, measuring its investment worth.

2.7 The task aims mainly at ensuring that scarce resources are put to most effective use.

2.8 It requires the combined efforts of a team of persons from various disciplines (engineers, financial analysts, economists etc.) working in close, co-ordination.

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3. Scope of Project Appraisal

3.1 Market Feasibility study.

3.2 Technical Feasibility / viability.

3.3 Financial Soundness.

3.4 Management and Organizational Aspects / Managerial

Soundness.

3.5 Economic viability / Appraisal.

3.6 Environmental Appraisal / Viability.

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3.1 Market Feasibility

a) Whether sufficient demand does exist?

b) In case of import substitution whether domestic cost of production is less than cost of import.

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3.2 Technical Appraisal

a. Availability of inputs at reasonable cost.b. Consistency & soundness of engineering

design.c. Economics of scale in production.d. Appropriate technology & alternative ways of

production.e. Advantageous Location of the project.f. Maintenance & Repairs.g. Provision for expansion.h. Balancing of equipment

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3.3 Financial Soundnessa. Exhaustive & realistic cost estimationb. Sound capital structure: Fund Sourcec. Provision for working capital requirementd. Generation of sufficient cash flow to cover debt-service

Liability. e. Generation of adequate profit.f. Safety margin.g. Break- Even Pointh. Pay back period.

Pay back period: Pay back period is a measure of Project’s Capital recovery. It is defined as the Length of time it takes to recover the initial investment of a Project.

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3.4 Managerial Soundness

a. Experience of the top managerial personnel in the line.

b. Expertise and ability of supervisory staff members.

c. Balance between supervisory staff and work forces.

d. Clarity of job description, responsibility and accountability.

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3.5 Environmental Aspects

The environmental impacts include –a. Ecological : Fisheries, Tree Plantation,

Wet Land / Wet Land Habitat, Forest.

b. Physico- Chemical : Flood Control & Drainage Erosion, Drainage, Congestion / Water Logging, Obstruction to waste water Flow, Soil Fertility, Early Flooding.

c. Human Interest : Areas of Settlements, Agricultural Lands, Navigation / Boat Communication, irrigation Facilities, Landscape, Land values.

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3.6 Measurement of Investment Worthiness

a. What benefit does the project promise for its sponsors or owners?

a. What benefit does the project promise for the national economy?

The satisfactory answers to these questions provide the prime test of a project’s acceptability.

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4. Methods of Calculating Profit Worthiness.

4.1 Net Present Value = NPV

4.2 Benefit Cost Ratio = B/C Ratio

4.3 Internal Rate of Return = IRR

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5. Formula for:

5.1 NPV = Discounted Total Benefits – Discounted Total costs.

5.2 B/C Ratio = Discounted Total Benefits

Discounted Total costs

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5.3 Formula for IRR: NPV3. IRR = LRD + LRD x ( HRD – LRD )

NPV - NPV LRD HRD

Where,LRD = Lower Rate of Discount at which NPV is positive;HRD = Higher Rate of Discount at which NPV is negative;NPV = Net Present value at the Lower Rate of Discount; LRDNPV = Net Present value at the Higher Rate of Discount. HRD

What is IRR? IRR = Internal Rate of Return is that rate of discount that

makes/ reduces the Net Present Value (NPV) of a project is to Zero.

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Year Cost Benefit Discount Factor at

15%

Discounted Cost

Discounted

Benefit

D.F at 25%

Discounted Cost

Discounted Benefit

0 200 - 1.00 200 - 1.00 200 -

1 60 160 .870 52.2 139.2 .800 48.00 128.00

2 60 160 .756 45.36 120.96 .640 38.40 102.4

3 60 160 .658 39.48 105.28 .512 30.72 81.92

337.04 365.44 317.12 312.32

NPV = DTB – DTCNPV at 15% = 365.44 – 337.04

= 28.40

B/C at 15% = 365.44 337.04

= 1.08

NPV at 25% = 312.32 – 317.12 = - 4.8

IRR = 15 + 28.4 × (25 -15) 28.4 – (- 4.8)

= 15 + 28.4 × 10 28.4 + 4.8

= 15 + 28.4× 10 33.2 = 15 + 8.55 = 23.55 IRR = 23.55%

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6. Acceptability Criteria

6.1 NPV (Net Present Value) if NPV > 0 ACCEPTif NPV < 0 REJECT if NPV = 0

AMBIGUOUS

6.2 BCR (Benefit Cost Ratio) if BCR > I ACCEPTif BCR < I REJECTif BCR = I

AMBIGUOUS

6.3 IRR (Internal Rate of Return) if IRR > r ACCEPTif IRR < r REJECTif IRR = r

AMBIGUOUS\

r = MARKET RATE OF INTEREST

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7. The basic difference between Financial Appraisal &Economic Appraisal

Financial Appraisal Economic Appraisal

a. Profitability or worthiness of any

project is determined or judge from

the point of view of an individual/

Entrepreneur.

a. Profitability/ viability or worthiness

of any project is determined or

judged from the point of view of

the society or nation as a whole.

b. Only direct cost and direct benefits

are considered while determining the

profitability of the project.

b. Include both direct and indirect

cost and benefits.

c. Cost and benefit evaluated at market prices.

c. Costs and benefits are evaluated at shadow price/ Accounting price.

d. Use Market Rate of Discount d. Use Social Rate of Discount.

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8. Types of Project Appraisal

8.1 Financial / commercial Appraisal

8.2 Economic Appraisal

8.3 Technical Appraisal

8.4 Social Appraisal.

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9. Conclusion:

9.1 Project appraisal is the basic criterion of selecting a project.

9.2 Objectives of project appraisal are to measure the different worthiness of a project

9.3 Scope is wide and essential9.4 Environment impact is crucial in project

implementation.9.5 Measurement of investment worthiness are

principal decision making tools.9.6 Positive signal is the key to successful

selection of a project.

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