UNIT-5

Project Formulation and Appraisal

Preparation of Project Report:
After the preparation of a business plan by evaluating a business idea, the next step is
to garner financial support. For bringing in financial support an entrepreneur requires
to submit a detailed project report which should cover the following basic aspect.
 Information about the promoters of the enterprise
 Information about the basic objective of the enterprise
 Information about the product and the processes involved
 Location of the enterprise
 Size of investments
 Estimated cost of the project and ability of financing thereof
 Technical arrangements
 Information about environmental concerns
 Profitability projections and cash flows.

Contents of a Project Report:

When we sit down to prepare a project report, the biggest challenge we face is what
things we need to keep in mind to prepare an ideal project report because business
plan or project report is not prepare to shortcuts.

Hence project report should be prepared with great care and consideration. A
good project report should contain the following.

 General Information: Information on product profile and product details.

 Promoter : His educational qualification, work experience, project related
experience.
 Location : Exact location of the project, lease or freehold, location advantages.
 Land and Building : Land area, construction area, type of construction, cost of
construction, detailed plan and estimate along with plant layout.
 Plant and Machinery : Details of machinery required, capacity, suppliers,
cost, various alternatives available, cost if miscellaneous assets.
 Production process : Description of production process, process chart,
technical knowhow, technology alternatives available, production programme.
 Utilities: Water, Power, steam, compressed air requirements, cost estimates
sources of utilities.
 Transport and communication: Mode, possibility of getting costs.
 Raw material : List of raw materials required by quality and quantity, sources
of procurement, cost of raw material, tie-up arrangements, if any for
procurement of raw material, alternative raw material, if any.
 Man Power: Man Power requirement by skilled and semi-skilled, sources of
manpower supply, cost of procurement, requirement of training and its cost.
  Products: product mix, estimated sales distribution channels, competitions and
their capacities, product standard, input-output ration, product substitute.
 Market: End-users of product, distribution of market as local, national,
international, trade practices, sales promotion devices, proposed market
research.
 Requirement of working capital: Working capital requirement, sources of
working capital, need for collateral security, nature and extent of credit
facilities offered and available.
 Requirement of funds: Break-up project cost in terms of costs of land,
building machinery, miscellaneous assets, preliminary expenses, contingencies
and margin money for working capital, arrangements for meeting the costs of
setting up of the project.
 Cost of production and profitability of first ten years
 Break-even analysis
 Schedule of implementation.

Formulation of project Report:

A project report is an operating document. So that what information and how much
information it contains depends upon the size of the enterprise, as well as nature of
production. Project formulation divides the process of project development into eight
distinct and sequential stages as below:

1. General information
2. Project description
3. Market potential
4. Capital costs and sources of finance
5. Assessment of working capital requirements
6. Other financial aspects
7. Economical and social variables
8. Project implementation
The nature of information to be collected and furnished under each of these stages has
been given below.
1. General Information:
The information of general nature given in the project report includes the following:
Bio-data of promoter : Name and address, qualifications, experience and other
capabilities of the entrepreneur. Similar information of each partner if any.
Industry profile : A reference analysis of industry to which the project belongs, e.g.,
past experience; present status, its organization, its problem etc.
Constitution and organization : The constitution and organization structure of the
enterprises; in case of partnership form its registration with registration of firms,
certificate from the directorate of industries.
Product Details: Product utility, product range, product design, advantage to be
offered by the product over its substitutes if any.
2. Project description:
A brief description of the project covering the following aspects should be made in the
project report.
Site : Location of the unit; owned,rented or leasehold land; industrial area; no
objection certificate from municipal authorities if the enterprise location falls in the
residential area.
Raw Material : Requirement of raw material, whether inland or imported, sources of
raw material supply.
Skilled Labour : Availability of skilled labour in the area i.e., arrangements for
training laborers in various skills.
Utilities : These include –
 Power
 Fuel
 Water
 Pollution Control
 Communication and transportation facility
 Production Process
 Machinery and Equipment
 Capacity of the Plant
 Technology Selected
 Other Common Facilities
 Research and Development
3. Market Potential:
While preparing a project report, the following aspects relating to market potential of
the product of the product should be stated in the report.
 Demand and Supply position
 Expected Price
 Marketing Strategy
 After Sales Service
Depending upon the nature of the product, provisions made for after-sales should
normally in the project report.
4. Capital costs and sources of finance:
An estimate of the various components of capital items like land and buildings, plant
and machinery, installation costs, preliminary expenses, margin of working capital
should be given in the project report.
5. Assessment of working capital requirements:
The requirement for working capital and its sources of supply should clearly be
mentioned. It is preferred to prepare working capital requirements in the prescribed
formats designed by limits of requirements.
It will reduce the objections from Banker’s side.
6. Other financial aspects:
To adjudge the profitability of the project to be set up, a projected profit and loss
amount indicating likely sales revenue, cost of production, allied cost and profit
should be prepared.
A projected balance sheet and cash flow statement should also be prepared to indicate
the financial position and requirements at various stages of the project.
Breakdown level indicates the gestation period and the likely moratorium required for
repayment of the loans. Break-Even point is calculated as
Break-Even point (BEP) = F/S – V
Where
F = Fixed Cost S = Selling Price/Unit V = Variable Cost/Unit
The break-even point indicates at what even of output the enterprise will break even.
7. Economical and social variables:
Every enterprise has social responsibility. In view of the social responsibility of
business, the abatement costs, i.e., the costs for controlling the environmental damage
should be stated in the project.
In addition the following socio-economic benefits should also be stated in the report.
 Employment Generation
 Import Substitution
 Ancillaration
 Exports
 Local Resource Utilization
 Development of the Area
8. Project implementation:
Every entrepreneur should draw an implementation scheme or a time-table for his
project to the timely completion of all activities involved in setting up an enterprise. If
there is delay in implementation project cost overrun.
On the other words, delay in project implementation jeopardizes the financial viability
of the project.
In last words, An entrepreneur should have always prepare ideal project report to
avoid loss and always the above facts should be kept in mind while making the project
report. Otherwise There is a lot of chance that the project will failure.
PROJECT APPRAISAL
Project appraisal is examined prima facie that whether the project is acceptable under
certain rules which could be the experience and background of the applicant, the
potential demand of the product, whether the project is meeting the governmental
requirements and status etc.
1. Appraisal from External Agencies: Financial Agencies
The financial external agencies appraising the project, their point in
contention is to look for credit appraisal. In this before a credit facility is provided to
the entrepreneur, the proposal is checked rigorously. It involves in-depth study of all
the feasibility aspects studied earlier viz., financial, technical, commercial, managerial
etc. Generally, in order to sanction an amount it is prudent for the banks and other
financial institutions to assess the data provided by the entrepreneur in an unbiased
manner. This assessment can be further by financial institutions by outsourcing the
data gathering exercise to independent agencies because the borrowers could tamper
or favourably place the data to suit their needs. Loan appraisal by financial institutions
and banks require careful scrutiny of the highest level. Loan appraisal signifies the
capability of the borrower to repay the principal loan amount and the interest thereof
in the period specified.
2. Appraisal from External Agencies: Non-Financial Agencies
Project appraisal done by non-financial agencies could require a checks and balances
on all the aspects of feasibility testing which is carried out by the entrepreneur in the
first step. It may involve a detailed estimation and research on the way of production
of the product in offing, proposed way of marketing the final product after the launch
etc. Project appraisal by non-financial institutions may also involve examining in a
systematic manner proper i.e effective and efficient utilization of resources which
could result into best results and ultimately ensuring product viability.
AREAS OF PROJECT APPRAISAL
1. Market/Marketing Appraisal: In marketing appraisal the emphasis is on
ascertaining the demand projections of the business under perusal. The examination of
whether the demand projections are in tune with the ground reality is done. Further,
the adequacy of the marketing infrastructure is assessed by evaluate the distribution
network, transport facilitates, stock levels, promotional efforts etc. The key marketing
managerial personnel are also judged for their level of competency and skills required
to get the job done.
2. Technical Appraisal: In this the focus is on the technical aspects. It is basically an
appraisal of the technical feasibility ascertained by the entrepreneur. In this the overall
appraisal of the technology and the manufacturing process, location decisions,
decisions related to plant and machinery, and also the raw materials and other inputs is
done.
3. Managerial Appraisal:
 Promoter’s resourcefulness check
 Credibility of the plan project o Assessment of the organizational structure o
Estimated cost of the project
 Commitment of the promoters towards the work
Managerial Competence: In managerial competence appraisal the focus is on
evaluating the level of competence of the people at the helm of affairs. The question is
whether the management has the insight and ability to pull off a project. The emphasis
is on the determination of the ability of the project to implement and carry on the
business in a manner desired.
4. Ecological Analysis: Ecological analysis is a part of project appraisal and
nowadays it has assumed specific importance. With the glaring problems like global
warming, and climate change the attention is in those industries viz., pharmaceuticals,
chemicals, leather processing etc. which do have an adverse impact on the
environment. Also those industries that have a known history of creating detrimental
effects on the environment are asked to correspond to mandatory norms and devise
new techniques of production.
Steps of Project Appraisal Technical Appraisal:
Determines whether the technical parameters are soundly conceived, realistic and
technically feasible. Technical feasibility analysis is the systematic gathering and
analysis of the data pertaining to the technical inputs required and formation of
conclusion there from. The availability of the raw materials, equipment,
hard/software, power, sanitary and sewerage services, transportation facility, skilled
man power, engineering facilities, maintenance, local people etc., depending on the
type of project are coming under technical analysis. This feasibility analysis is very
important since its significance lies in planning the exercises, documentation process,
risk minimization process and to get approval.
 Physical scale
 Technology used & Type of equipments & Suitability conditions
 How realistic is the implementation schedule
 Labour intensive method or others
 Cost estimates of Engineering Data
 Escalation are taken care of or not
  Procurement arrangement
 Cost of operation & Maintenance
 Necessary raw material & Inputs
 Potential impact of project on human & physical Environment
Financial Appraisal:
To determine whether the financial costs and returns are properly estimated and
whether the project is financially viable. Following minimum details are determined in
the financial appraisal;
 Total Cost
 O & M Expenditure
 Opportunity costs
 Other costs
 Returns on Investment over project life
 NPV
 CBR
 IRR
Institutional Appraisal:
To determine whether the implementing agencies as identified in the report are
capable for effective implementation, monitoring, and evaluation of the scheme.
Managerial competence, integrity, knowledge of the project, the promoters should
have the knowledge and ability to plan, implement and operate the entire project
effectively. The past record of the promoters is to be appraised to clarify their ability
in handling the projects.
 Whether the entity is properly organised do the job
 Strength to use capability and take initiatives to reach the objectives
 Openness to new ideas and willingness to adopt long term approach to extend
over several projects
Commercial Appraisal:
The demand and scope of the project among the beneficiaries, customer friendly
process and preferences, future demand of the supply, effectiveness of the selling
arrangement, latest information availability on all areas, government control measures,
etc. The appraisal involves the assessment of the current demand/market scenario,
which enables the project to get adequate demand. Estimation, distribution and
advertisement scenario also to be here considered into. Environmental Appraisal To
see any detrimental environmental impacts and how to minimise the impacts.
Environmental appraisal concerns with the impact of environment on the project. The
factors include the water, air, land, sound, geographical location etc.
Economic Appraisal:
How far the project contributes to the development of the sector, industrial
development, social development, maximizing the growth of employment, etc. are
kept in view while evaluating the economic feasibility of the project.
Legal Appraisal: To determine whether the project satisfies the legal issues related
to land acquisition, title deed, environmental clearance etc

I) Technical Feasibility:
1. Technology and manufacturing process:
 Novel technology to be used,
 Basis of selection of technology,
 Competing technologies,
 Performance data of plants based on the technology,
 Licensor documents.
2. Location of the Project:
 Advantages based on location,
 Availability of inputs viz., raw material and other resources,
 labour availability,
 Environmental clearances
3. Plant and Machinery:
 List of machinery & equipment,
 Details of suppliers, competitive quotations, technical & commercial evaluation
of major equipment
4. Raw material, Utilities and Manpower
5. Project monitoring and implementations:
 Mode of implementation,
 Details of monitoring team,
 Detailed schedule of implementation.
II)Environmental Aspects: Air, Water and Soil Pollution, list of
pollutants/hazardous substances, their safety, handling and affluent disposal
arrangements, compliance with national and International Standards, clearances and
no objection certificates required and obtained etc.
III) Commercial Viability:
 Proposed products existing and potential market demand and supply
 Proposed products share forecasted and analysed with respect to the market
 Manufacturing cost analysis
 Sale price of the proposed product
 Export potential analysis Financial Feasibility
 Project Cost Analysis
 Operating cost and profits
 Operational performance and financial evaluation
 Financing modes
 Working Capital requirements
 Projections of Profitability Projected income statement and balance sheets Cash
flow estimates