Concept of appraisal

Appraisal is the evaluation of the ability of the project to succeed. The project evaluation is done after the feasibility study of the project has been completed. The objective of the appraisal is simply to study & compare the possible feasible project & select the best that meets the objectives of the project. Project appraisal is carried out in a systematic & scientific manner because it determines the success & failure of the projects.

S. K. Chatterji, Appraisal is a tool of management when by the executive is able to focus his attention on specific aspects & areas of operation with a view to ensuring that the actual performance confirms as closely as possible to establish goals. Broadly, the following type of appraisal may be undertaken while evaluating an investment proposal: (method of project Evaluation) 1. Market appraisal : 2. Economic appraisal 3. Technical appraisal 4. Managerial appraisal 5. Environmental appraisal 6. Financial appraisal Tools of Project Analysis & Evaluation/ Project Appraisal Project appraisal is concerned with evaluating the overall ability of the feasible project to succeed. Numerous tools & techniques are used for the project appraisal. The commonly used tools & techniques of the project appraisal are: 1. Cost-benefit analysis 2. Capital budgeting techniques 3. Financial analysis 1. cost-benefit Analysis The most popular methods of project appraisal & evaluation are to consider the cost benefit analysis of different project & then select involving lesser cost & yielding greater benefits. It evaluates the overall economic impact of project. It is used to ascertain whether or not a specific project should be undertaken. It is also used to ascertain which project should be selected out of many projects.

Cost benefit analysis is an analytical tool in decision making which enables a systematic comparison to be made between the estimated cost of undertaking a project & the estimated value & benefits which may arise from the operation of such project. Cost benefit analysis can be used both for private & public projects. For private projects, CBA examines profitability or projects ability to earn net profit to the investors. For public projects, CBA examines social profitability or projects contribution to national economy by achieving goals of economic growth, social development, income redistribution, poverty reduction, employment generation etc.

2. Capital budgeting decision Capital budgeting techniques are used to make capital investment decisions especially for investment in fixed assets. A wide variety of techniques have been suggested to judge the worth wholeness of investment project. Generally, non-discounted & discounted cash flow techniques are applied for the appraisal of project.

Non-discounted a. Ranking by inspection: selecting by ranking project on basis of time, returns and investment b. Payback period: It measures the period of time required for the cost of a project to be recovered from the earnings of the project. c. Accounting Rate of Return Method:This method is considered better than pay-back period method because it considers earnings of the project during its full economic life. This method is also known as Return On Investment (ROI). Discounted a. Internal rate of return(IRR): It is discounted cash flow techniques. The trial & error method is used to find the discount rate which equates the PV of cash outflows & cash inflows to zero. IRR is the rate of return where either NPV is zero or total PV(TPV) is equal to NCO. If IRR is greater than the required rate of return, the project is acceptable. b. Net present value (NPV): The difference of present value of cash inflow & PV of cash outflow is the net present value. If the PV of the total benefits is higher than the PV of the total costs, the project is acceptable. The NPV must be positive. c. Profitability index (PI): Profitability Index is the ratio of present value of expected future cash inflows and Initial cash outflows or cash outlay. It is also used for ranking the projects in order of their profitability. It is also helpful in selecting projects in a situation of capital rationing.

3. Financial analysis of development project A development project is a public project. It is generally sponsored by the government. The funding of a development project in most cases is through foreign aid. The financial analysis of a development project is concerned with its financial sustainability. Under the financial analysis, the following factors are included:

a. Capital requirements: The funding requirements of the project are assessed as to their adequacy. The need & requirement of financial resources should be determined. b. Sources of funds: The reliability of the sources of funds to finance the development project is assessed. d. Projected cash flow: The projected cash flow is examined to assess the projects capacity to meet financial obligation. e. Accounting & reporting system: The adequacy & reporting system is assessed. The capacity to claim reimbursement on time is also assessed. f. Profitability: Revenue & expenditure forecasts are examined to access the projects profitability.

Analysis of financial statement