PROJECT APPRAISAL

AND EVALUATION
Projects are cutting edges of
development.

Project refers to a specific activity

with specific starting point, and
specific ending point, to achieve a
specific objective.
 PLAN
FYP

PROGRAMME
IRDP

PROJECT
WATERSHED DEV.PROJECT
 SALIENT FEATURES
measurable costs and returns
area of geographic concentration
clientele group
well defined time sequence of
investment and production activities
independent administrative structure
and accounts
 PROJECT CYCLE

The natural sequence in which a project is

planned and implemented
 PROJECT IDENTIFICATION

PROJECT PROJECT
EVALUATION FORMULATION

PROJECT
PROJECT
IMPLEMENTATION &
MONITORING APPRAISAL
. PROJECT IDENTIFICATION
Ideas
--Need based approach
--Brainstorming
--International/National agencies
--New projects emerge out of the existing

ones
 PROJECT FORMULATION
All the planning and preparation carried out to bring a project idea to the point of
appraisal
Preparation of project report

Basic data required

inputs
outputs
prices
estimated costs
estimated returns
 APPRAISAL

Re-examine every aspect of the project plan to

asses whether the proposal is appropriate and
sound before large sums are committed.
 Implementation

The better and more realistic the project plan is,

the more likely that it can be smoothly
implemented and expected benefit realized

Project implementation must be flexible.

 EVALUATION
Evaluation is conducted
- for completed projects
- - when project is in trouble
-when a major capital investment
is planned
A project report should include
Technical aspects
Commercial aspects
Managerial and Administrative
aspects.
Organizational aspects
Financial aspects
Institutional aspects
Social aspects.
Environmental aspects
 TECHNICAL ASPECTS
Suitability of the location
Requirement and availability of raw materials
Infrastructure requirements
Availability of technical and utility services
Process of production
Gestation period
Technical standards of raw materials and products
Suggested capacity and capacity utilization
Schedule of implementation
 COMMERCIAL ASPECTS

Input supply management

Production strategy
Demand forecasting
Sales forecasting
Demand supply gap
Pricing strategy
Distribution strategy
 MANAGERIAL ASPECTS
Managarial skills of implementing
personnel
Trainings undergone

Entrepreneurial skills

Training facilities available in the area

 ORGANISATIONAL ASPECTS
Organisational design
Line of authority
Delegation of powers
Monitoring arrangements
Accounting arrangements/cash
disbursements
Linkage with other organisations
 FINANCIAL ASPECTS
Capital requirements of the project
Sources of capital
Grace period and credit maturity period suggested
Anticipated cost of capital
Securities offered/available
Repayment schedule proposed
Annual repayment capacity
Cashflow statement
 Social aspects
- social patterns and practices of clientele
-
social implications
-
income distribution
-
responsive to national objectives
( employment creation, gender concerns)

quality of life ( drinking water supplies, rural health care,

educational opportunities)
 INSTITUTIONAL ASPECTS
- system of land tenure

- size of holding

- role of local institutions

- institutional linkages

Mminimizing social frictions

 Environmental aspects

POLLUTION effects
on environment/flora and fauna
 PROJECT APPRAISAL
(INVESTMENT ANALYSIS)
Operating Investment Capital Investment
• Expenses and returns falls • Investments are made in
within a production different time periods and
cycle/year returns are also spread over
• The time element is not time.
brought into consideration • Time value of money is
• E.g. seed, feed, fertilizers assessed for investment
etc. analysis.
• E.g. land, machines,
livestock etc.
 TIME VALUE OF MONEY
Future value of Present Present value of Future
money money
• A rupee today is worth • Current value of investment to
more than rupee tomorrow. be received in the future at a
• Interest is added to the specified date.
principal at the end of each • Future sum is discounted back
time period(compounding). to the present time to find
• A = P (1+i)t current value (discounting).
• A= future value of present • PW = P / (1+i)t
sum invested • PW= present worth of future
• P= principal amt. money
• i= interest rate • P = Money value in the future
• i= discount rate
 Project Appraisal
Undiscounted Measures Discounted Measures
• Ranking by Inspection • Net Present worth (NPW)
• Pay Back period • Benefit- Cost Ratio (B-C ratio)
• Proceeds per rupee of • Internal Rate Of Return (IRR)
outlay
 Discounted Measures
• Cash flows are the yearly net benefits accrued
from the project
• Weighed by discount rate- discounted cash
flows
• Discounted cash flows are the best estimates
to decide on the worth of the project
 Net Present Worth (NPW)
Is the present worth of Cash flow

Ct = Net cash flow

r = discount rate
t = time period
C0 = Initial cost of investment
 Step: 1. Identify the project or
investment you will be analyzing
• Estimation of NPV for sericulture

Year Costs (in Rs) Returns ( in Rs)

1 20000 -
2 9239 28475
3 10575 32550
4 11952 35610
5 12858 39802
 STEP 2 : Determine the expected cash flows
associated with the project or investment.
Year Costs (in Rs) Returns ( in Rs) Net cash flow
1 20000 - -20,000
2 9239 28475 19,236
3 10575 32550 21,975
4 11952 35610 23,658
5 12858 39802 26,944
 STEP 3. Determine the appropriate
discount rate
• 12%
Year Costs (in Rs) Returns ( in Net cash flow Discount
Rs) factor (12%)

1 20000 - -20,000 .8929

2 9239 28475 19,236 .7972

3 10575 32550 21,975 .7118

4 11952 35610 23,658 .6355

5 12858 39802 26,944 .5674

 STEP 3. Discount all the cash flows
Year Costs (in Rs) Returns ( in Net cash Discount Net
Rs) flow factor (12%) Discounted
cash flow
1 20000 - -20,000 .8929 -17,858
2 9239 28475 19,236 .7972 15,334.94
3 10575 32550 21,975 .7118 15,641.81
4 11952 35610 23,658 .6355 15,034.66
5 12858 39802 26,944 .5674 15,288.03
∑ Ct = 43,441.44
 STEP 4. Calculate NPV

• = 43441.44-20000
• =23441.44
 Mango orchard (1 ha)
Year Costs Benefits Net cash Discount Net
(in Rs.) (in Rs.) Flow factor Discount
(12%) ed cash
flow
At the end 25,000 --- .507
of 6th year
“ 7th year 4,250 10,260 0.452
“ 8th year 4,792 12,550 0.404
“ 9th year 5,368 14,530 0.361
“ 10th 5,975 16,275 0.322
year
“ 11th 6,456 19,396 0.287
year
“ 12th 7,187 21,470 0.257
year
 STEP 5.Determine whether or not to
accept the project
If... It means... Then...
the investment would add the project may be
NPV > 0
value to the firm accepted
the investment would
the project should be
NPV < 0 subtract value from the
rejected
firm
We should be indifferent in
the decision whether to
accept or reject the
project. This project adds
the investment would
no monetary value.
NPV = 0 neither gain nor lose value
Decision should be based
for the firm
on other criteria, e.g.,
strategic positioning or
other factors not explicitly
included in the calculation.
 Conclusion
• NPV estimated for sericulture is positive, so
the project can be accepted
 Estimation of B-C Ratio and IRR of
two Projects.
• 2. B-C Ratio
• Compares the present worth of costs with
present worth of benefits.
• Will choose the project having ratio more than
one .
• B -C ratio = present worth of gross returns
present worth of costs
Estimation of B-C ratio for two projects
• Sericulture (1 ha)
Year Costs Benefits Discou Present Present
(in Rs.) (in Rs.) nt worth of worth
factor costs of
(12%) benefits
1 38,900 --- .8929 34,733.81
2 9,239 28,475 .7972
3 10,575 32,550 .7118
4 11,952 35,610 .6355
5 12,858 39,802 .5674
• B -C ratio = present worth of gross returns
present worth of costs
= 91,083.18
64,517.56
= 1.41
 Mango orchard (1 ha)
Year Costs Benefits Discount Present Present
(in Rs.) (in Rs.) factor worth of worth of
(12%) costs benefits
At the end 25,000 --- .507
of 6th year
“ 7th year 4,250 10,260 0.452
“ 8th year 4,792 12,550 0.404
“ 9th year 5,368 14,530 0.361
“ 10th 5,975 16,275 0.322
year
“ 11th 6,456 19,396 0.287
year
“ 12th 7,187 21,470 0.257
year
• B -C ratio = present worth of gross returns
present worth of costs
= 31,278.04
24,093.70
= 1.30
 Internal Rate of Return (IRR)
• Provides the knowledge of actual rate f return
from different projects.
• Is known as the ‘marginal efficiency’ of capital
or yield on the investment
• It is the discount rate at which present values
of the net cash flows are just equal to zero.
• i.e., NPW = 0
• Or Net Present Costs = Net Present Benefits
• The IRR must be found out by trial and error
with some approximation.
• In the working procedure , an arbitrary
discount rate is assumed and its
corresponding NPW is arrived at.
• The + NPW value of the project indicates that
IRR is still higher and the next assumed
arbitrary IRR value must be comparatively
higher than the initial level.
• This process is continued till NPW becomes
-ve.
 Estimation of IRR for two projects
• Sericulture (1 ha)
Year Costs Gross Net Discoun Net present Discoun Net
(in Rs.) returns Income t factor worth t factor present
(in Rs.) (40%) (at 40 %) (43%) worth
( at 43 %)

1 38,900 --- -38,900 .7143 -27,786.27 .6993

2 9,239 28,475 .5102 .489
3 10,575 32,550 .3644 .3419
4 11,952 35,610 .2603 .2391
5 12,858 39,802 .1859 .1672
∑ ∑
• IRR = 40+3[1202.69/ (1202.69+121.46)]
 Mango orchard (1 ha)
Year Costs Gross Net Income Discount Net Discoun Net
(in Rs.) returns factor present t factor present
(in Rs.) (25%) worth (30%) worth

At the end 25,000 --- .262 .207

of 6th year
“ 7th year 4,250 10,260 .21 .159
“ 8th year 4,792 12,550 .168 .123
“ 9th year 5,368 14,530 .134 .094
“ 10th year 5,975 16,275 .107 .073
“ 11th year 6,456 19,396 .086 .056
“ 12th year 7,187 21,470 .069 .043
∑ ∑
• IRR = 25+5 [443.49/(443.49+313.24)
=
• CONCLUSION:
• The B-C ratio and IRR of sericulture is () and
for mango orchard is () respectively. Based on
these results sericulture is found to be more
acceptable than the project on mango
orchard.
• The cost benefit out-lay of a buffalo rearing
unit consisting of 10 buffaloes and a poultry
( broiler unit) consisting of 1000 birds is given
below, find out whether the project is feasible
considering 15 % as the discount rate. Also
find out among the two which one is more
acceptable using NPV, B-C ratio and IRR
techniques.
 A buffalo unit with 10 buffaloes
Year Total Costs Total Discount Discount Discount
benefits factor factor factor
(15%) (25%) (30%)

1 6,32,740 2,78,910 0.8696 0.8 0.7692

2 1,85,140 3,22,180 0.7561 0.64 0.5917
3 1,85,140 3,22,180 0.6575 0.512 0.4552
4 1,80,640 2,95,660 0.5718 0.4096 0.3501
5 1,80,080 2,92,350 0.4972 0.3277 0.2693
6 1,85,140 3,22,100 0.4323 0.2621 0.2072
7 1,82,810 3,22,050 0.3759 0.2097 0.1594
 Broiler unit of 1000 birds
Year Costs Benefits Discount Discount Discount
factor factor factor
(15%) (40%) (45%)
1 726642 581992 0.8696 0.7143 0.6897
2 612606 678642 0.7561 0.5102 0.4756
3 612606 678642 0.6575 0.3644 0.3280
4 612606 678642 0.5718 0.2603 0.2262
5 612606 678642 0.4972 0.1859 0.1560
6 612606 678642 0.4323 0.1328 0.1076
7 612606 678642 0.3759 0.0949 0.0742
 Undiscounted Measures
• Ranking by inspection
1. Based upon size of costs and length of cash-flow
stream.
– Suppose if projects having same investment and
same net value of production, but with difference
in length of the period, then the project with
longer duration is preferred.
– This leads to bias in choice.
2. Payback period :
– Length of the required to get back the
investment on the project.
– P= I/ E
P = pay back of the project in years,
I = Investment of the project in Rs.
E = annual net cash revenue in Rs.
3. Proceeds per Rupee of Outlay
– worked out by dividing total proceeds wit total
amount of investment.
– Project is ranked based on highest value of the
parameter.
Sensitivity Analysis