Project Appraisal
Project appraisal means pre-investment analysis of a project with a view
to determining the overall feasibility and measures its investment worth
Major components
• Market Feasibility Viable
• Technical Feasibility Available
• Managerial Feasibility Manageable
• Financial Feasibility Profitable
• Economic Feasibility Sound
• Social/Environmental Feasibility Sustainable
Market Feasibility
What product?
Product Characteristics
Product Classification
Product Uses
Who wants the product and why?
Market size and structure
– Consumer goods
– Industrial goods
Composition of demand
– New vs. replacement demand
Where does he want the product?
Distribution channels, Structure
Type of intermediaries
Existing distribution practices
Market Feasibility (contd.)
How does one learn about the product?
Forms of promotion
Market susceptibility
How much one is prepared to pay?
Price change
Price elasticity
Who are the competitors?
Manufactured locally
Imported
Substitute
Government policies:
On production/consumption
On Import/Export
Taxes/Subsidies
Market Feasibility (contd.)
Market Survey/Study
Existing Demand/Supply
Future Demand/Supply
Calculate Gap = Demand - Supply
Formulation of Market Strategy
Technical Feasibility
• Capacity and product mix
• Technology/technology factor
• Manufacturing process
• Land and location
• Building (existing/proposed)
• Machinery/Equipment
• Installation of machinery
• Operation of machinery
• Utilities: Electricity/Water/Gas
• Raw material
• Repair/maintenance
• Store/spares
• Safety measures
• Waste disposal
Managerial Feasibility
• Organizational structure
• Operational system
• Manpower requirements/qualifications
• Capability/buildups
• Organizational culture
Financial Feasibility
• Magnitude of capital/operating cost
• Financial plans and budgets
• Sourcing and timing of budget
• Financial statement
• Financial viability
• Sensitivity analysis
Economic Feasibility
• Constraints facing the economy
• Key sector analysis
• Economic costs and benefits
• Economic assessment
• Multiplier effects
Social/Environmental Feasibility
• Socio-cultural/religious/demographic characteristics
• Social acceptability
• Ecological effects
• Social/environmental strategies
Investment Criteria
Time Value of Money: Money value changes with time
• Net Present Value:
Sum of the present values of all the cash flows that are expected to occur
45,000/-
35,000/- 40,000/-
30,000/-
0
1 2 3 4
Tk. 1,00,000/-
Investment Criteria (contd.)
Year Cash Flow Present Value @ 10%
0 -1,00,000 -1,00,000
1 30,000 27273
2 35,000 28926
3 40,000 30053
4 45,000 30736
Profit 50,000 16,988
NPV = 16,988/-
Investment Criteria (contd.)
• Pay Back Period:
Length of time required to recover the initial cash outlay on the project
Year Cash Flow Balance
0 -1,00,000 -1,00,000
1 30,000 -70,000
2 35,000 -35,000
3 40,000 +5,000
4 45,000
Pay Back Period = 3 yrs
Investment Criteria (contd.)
• Discounted Pay Back Period:
Cash flows at different time period is converted into present value
Year Cash Flow Present Value @ 10% Balance
0 -1,00,000 -1,00,000 -1,00,000
1 30,000 27273 -72,727
2 35,000 28926 -43,801
3 40,000 30053 -13748
4 45,000 30736 +16988
Discounted Pay Back Period = 4 yrs
Investment Criteria (contd.)
• Internal Rate of Return:
The discount rate which equates the present value of cash inflows with
the present value of cash outflows, i.e., NPV is zero
30,000 35,000 40,000 45,000
NPV = + + + −1,00,000 = 0
(1 + r ) (1 + r ) (1 + r ) (1 + r )
2 3 4
Total Present Value of Cash Inflow = Total Present Value of Cash Outflow
30,000 35,000 40,000 45,000
+ + + =1,00,000
(1 + r ) (1 + r ) (1 + r ) (1 + r )
2 3 4
Investment Criteria (contd.)
• Profitability Index (PI):
PI =
PV (Cash in flow)
PV (Cash out flow)
• Benefit Cost Ratio:
Includes all kind of social benefits as project return
BCR =
PV (Cash in flow) + Social Benefit
PV (Cash out flow)
