UNIT :

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SYLLABUS
1. Concept of Project Appraisal
2. Appraisal Factors
3. Importance of Project Appraisal
4. Tools of Project Analysis and Evaluation
5. Similarities and Differences on Project
Analysis
6. Managing Project Risk
7. Managing Project Quality
8. Reasons for Success and Failure of
Project
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 1. CONCEPT OF PROJECT
APPRAISAL
Appraisal is the evaluation of the overall ability of the feasible project
to succeed. It is done after the feasibility study of the project has been
completed. The aim is to consider and compare the possible feasible
projects and selects that meets the objectives.

Project appraisal is a technique of evaluating and analyzing investments

entirely. It is an effort of calculating the project’s viability.

 The process of determining real situation of a project is

called
appraisal of project.
 Appraisal of project is necessary for proper implementation
of project.
 Appraisal is necessary to find out whether the project is
being operated properly or not.
 After the project has been completed appraisal is necessary to find
objective.
out whether the project has become successful to achieve
 the
So, appraisal is necessary at every stage of project. 3
Project appraisal is the structured process of assessing the viability (capability,
possibility, feasibility, sustainability etc.) of a project or proposal. It involves
calculating the feasibility of the project before committing resources to it. It is a
tool that company’s use for choosing the best project that would help them to
attain their goal. Project appraisal often involves making comparison between
various options and this done by making use of any decision technique or
economic appraisal technique.

The primary function of appraisal is to evaluate a project’s ability to achieve its

objectives. For a private project, the objective is profitability. For a public
project, the objective is socio-economic development in the country through
economic growth, employment, poverty reduction etc.

Project appraisal is a tool which is also used by companies to review the project
completed by it. This is done to know the effect of each project on the company.
This means that the project appraisal is done to know, how much the company
has invested on the project and in return how much it is gaining from it.

In conclusion, we can say that project appraisal is a systematic manner of

judging whether the project is viable for client or is not or whether is profitable
for the client or is not.
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 2. APPRAISAL
During project appraisal, hard questions will be asked and the answers will
FACTORS
determine whether the project proposal will be adopted or rejected. The
questions raised will include concerns such as appropriateness of project
objectives, size, scope, implementation methods and modalities, implementation
time scale, and the project technical, financial, economic, instructional,
environmental, social and distributional justification of the project. Thus, these
aspects are re-examined on the basis of following grounds:
1. Technical Assessment/Appraisal

2. Economic Assessment/Appraisal

3. Marketing Assessment/Appraisal

4. Financial Assessment/Appraisal

5. Environmental Assessment/Appraisal

6. Management Assessment/Appraisal 5
1. TECHNICAL APPRAISAL
Technical Appraisal is the technical review to ascertain that the project is sound
with respect to various parameters such as technology, plant capacity, raw
material availability, location, manpower availability, etc.

2. ECONOMIC APPRAISAL
Economic assessment is in terms of worth of the project to the society. The costs
and benefits of the projects are assessed and summarized. The criteria used for
assessment are:
 Comparison of Benefits and Costs
 Cost-Benefit Ratio
 Internal Rate of Return
 Net Present Value

3. MARKETING APPRAISAL
Factors such as project capacity, market demand, market coverage, demand
forecast, estimated revenue, marketing programme, competition and ability to
satisfy customers are summarized and assessed.
• Product, price, place, promotion aspects are assessed.
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4. FINANCIAL APPRAISAL
Factors such as capital requirements, sources of funds, projected cash flow,
profitability, and the project’s capacity to meet financial obligations are
summarized and assessed.
Sensitivity (understanding, warmth, sympathy) analysis is done to test the effects of
changes in variables such as cost, price and time on the project’s ability to achieve
objective. Ratio analysis is done to assets liquidity and profitability. The effect of
inflation is assessed.

5. ENVIRONMENTAL APPRAISAL
The positive and adverse environmental impacts of the project are summarized
and assesses. EIA (Environmental Impact assessment) is reexamined.

6. MANAGEMENT APPRAISAL
Important features of project organization and management, institutional
relationships, management capacities and limitations and impact of stakeholders
on the project are summarized and assessed.
OR,
It focuses on project organization, management, institutional relationships,
management capacities in planning, organizing, staffing, leading, implementing
and controlling along with its limitations. 7
3. IMPORTANCE OF PROJECT APPRAISAL

Project appraisal is useful in following ways:

1. It helps in arriving at specific & predicted results.

2. It evaluates the desirability of the projects.
3. It provides information to determine the success or failure of a project.
4. It employs existing norms to predict the rate of success or failure of a
project.
5. It verifies the hypothesis framed for the project.

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 4. TOOLS OF PROJECT ANALYSIS AND EVALUATION
Project appraisal is concerned with evaluating the overall ability of the feasible
project to succeed.

Regular analysis and evaluation should be done to make a project successful.

There are many tools to use in evaluation and analysis of project. They are as
follows:

A.Cost
Benefit
Analysis

B.Capital
Budgeting
Techniques

C. Financial
Analysis

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 A. COST BENEFIT ANALYSIS
Cost benefit analysis measures the relationship between the cost of
undertaking a project, and the benefites likely to arise from the
changed situation.
This is an important tool of project analysis and evaluation. Limited
resources and means should be allocated for proper sectors. If the
investment is to be increased in one sector, it becomes less in other
sectors.
For instance-if investment is increased in agricultural sector, it
becomes less in education, health, and other sectors. So, it is
necessary to analyze cost benefit of the project and evaluate while
allocating limited means and resources.
Without doing cost benefit analysis and evaluating it, investment
goes in less beneficial sectors or possible benefit is lost. While
investing in any project, analysis should be done to find out how much
benefit may be possible.
Generally, cost benefit is measured with monetary value but the
present day business world includes social responsibilities in their
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So, while analyzing cost benefit of a project not only monetary
profit should not social benefit should be considered. In other
words, social interest also should be considered. Project is the product
of society. So, it should work remaining within the society.
Cost benefit analysis accepts the projects, which give both monetary
and social benefits. It provides quantitative and qualitative basis to
accept or reject the project. So, cost benefit is an important tool for
analyzing and evaluating a project.
 B. CAPITAL BUDGETING TECHNIQUES
The other important tool for evaluating and analyzing a project is known as
capital budgeting. It is also known as investment criteria.

Capital budgeting is the planning process used to determine whether

organization’s long term investment such as new machinery, replacement
an
machinery, new plants, new products, and research & development,
infrastructure development and public sector projects are worth pursuing. It is
the budget for major capital, or investment, expenditures.

In other words, it is process of evaluating and selecting long-term investment

consistent with the organization’s goal of maximizing stakeholders.

The various techniques available are:

i. Payback Period (PBP)

ii. Net Present Value (NPV)

iii. Internal Rate of Return (IRR)

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 i. Payback Period (PBP)

Advantages Disadvantages
• It is easy to operate and simple to • It does not consider cash flow after the payback
understand. period.
• It considers earnings from the project for • Time value of money is not considered.
the payback period. The uncertainty is
reduced.
• Loss through obsolescence is reduced. Short • It ignores uneven profits from various projects.
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payback period reduces risk.
 ii. Net Present Value (NPV)

Advantages Disadvantages
• It considers time value of money. • The discount rate may not be realistic.
• It considers cash flow over the total life • Its calculation is not easy.
of the project.
• The discount rate is specified.

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 iii. Internal Rate of Return (IRR)

Advantages Disadvantages
• It considers time value of money. • It is complex and difficult to use.
• It considers cash flow over the total life • The discount rate is not fixed.
of the project.
• Comparison of IRR with cost of capital • It needs to be used carefully for evaluating
considers the risk factors. exclusive projects. 14
 C. FINANCIAL ANALYSIS
A development project is a public project. It is generally sponsored by the
government or donors. The funding of a development project in most cases is
through foreign aid. The project can be bilateral or multilateral, either grant or
loan.

In Nepal, projects funded from the development budget of GoN are regarded as
development projects.

The financial analysis of a development project is concerned with its financial

sustainability. In project appraisal, the financial analysis focuses on:

a) Capital Requirements
b) Sources of Funds
c) Cash Flow
d) Accounting and Reporting System
e) Profitability

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PROJECT EVALUATION TECHNIQUES OF INTERNATIONAL AGENCIES
Evaluation is discovering success in achieving objectives. International agencies
such as UNIDO, World Bank and OECD have prescribed their own techniques
for evaluation of projects. These techniques use shadow price to ascertain the
value of investment, foreign exchange and unskilled labour.

The main techniques are:

UNIDO Technique

OECD: LM-II Technique

World Bank: BTS Technique

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PROJECT EVALUATION TECHNIQUES OF INTERNATIONAL AGENCIES
1. UNIDO Technique of Project Evaluation
The full form of UNIDO is United Nations Industrial Development Organization. It
primary role is to promote industrialization in developing countries with an emphasis on
manufacturing.

The UNIDO approach was first anticipated in the guidelines for project evaluation,
which provide a comprehensive framework for Social Cost Benefit Analysis (SCBA) in
developing countries. The rigor and length of this work created a demand for a succinct
and operational guide for project evaluation in practice. This approach is mainly based
on the publication of UNIDO (United Nation Industrial Development Organization)
named Guide to Practical Project Appraisal in 1978.

The UNIDO technique of project evaluation is based on:

1. Use of shadow price to calculate “real worth” of the project.

2. Measure of cost and benefits in terms if aggregate consumption which
affects standard living.
3. Use of discounted cash flow analysis to calculate net benefits.
4. Use of domestic currency for valuation purposes.
5. Focus o efficiency , saving, and equity considerations through stage-by-
stage analysis.

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PROJECT EVALUATION TECHNIQUES OF INTERNATIONAL AGENCIES
2.OECD Technique of Project Evaluation (LM-II Approach) (Little-Mirrless Approach)
The full form of OECD is Organization for Economic Cooperation and Development.
This approach was developed by Little and Mirrless. OECD approach is also called LM-
Approach. It is also known as LM-II approach. It was introduced in 1969.

According to this approach, the cost and benefit of the project is measured on the basis of
international prices. It has classified input and output of a project as commercial goods
and services, non-commercial goods and services and unskilled workers. Marginal costs
and marginal revenues are made the basis for the measurement of commercial goods or
services, whereas non-commercial goods or services are measured with marginal social
cost and marginal social benefits. Shadow price is fixed for the unskilled workers.

The main features of OECD-Approach are as follows:-

1. Shadow price is fixed for the foreign exchanged of saving and unskilled labour.
2. Rational prices of different elements are fixed.
3. Cost-benefit is measured on the basis of internal prices and marginal prices.
4. Cost-benefit is measured on the basis of uncontrolled social income, and
5. According to this approach, equal attention should be paid towards efficiency saving
and redistribution at a time.

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PROJECT EVALUATION TECHNIQUES OF INTERNATIONAL AGENCIES
3. World Bank Technique of Project Evaluation
World Bank was established in 1945 as an important financial organ of UNO, IBRD, IFC
and IDA operate under it. The project evaluation techniques of the World Bank is known
as BTS approach. It is an improved version of CECD’s LM-II approach.

Its salient features are:

1. This techniques emphasize the distributional efficiency factor in project selection.

2. It uses scales for measurement of savings and distribution of income. Distribution
patterns that benefit poor sections are emphasized. Standard and differentiated
procedures are used for project selection.
3. Project outputs and inputs are classified in traded goods and services, non-traded
goods and services and unskilled labour.
4. Shadow price of traded goods and services is calculated in terms of international price
(Border price numeraire).
5. Shadow foreign exchange rate is used to calculate the shadow price of traded goods
and services.
6. Shadow price of non-traded goods and services is based on standard consumption
factors (aggregate consumption numeraire).
7. The shadow price of labour is what other users of labour are willing to pay.
8. The costs and benefits are discounted to calculated net benefits.
9. All goods supplied locally which could be traded internationally are subject to a price
adjustment.
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 5. SIMILARITIES AND DIFFERENCES ON PROJECT ANALYSIS
OR,
Similarities and Dissimilarities between UNIDO and OECD
Approaches
UNIDO Approach OECD Approach
A) Similarities
1. All benefits and 1. All benefits and
costs are quantified in costs are quantified in
shadow prices. shadow prices.
2. Discounted cash flow analysis is used. 2. Discounted cash flow analysis is used.
3. Considers distributional efficiency or equity 3. Considers distributional efficiency or equity
factor. factor.
4. Calculates shadow 4. Calculates shadow
price for foreign exchange price for foreign exchange
savings and unskilled labour. savings and unskilled labour.
B) Dissimilarities
1. Measures costs and benefits in domestic 1. Measures costs and benefits in international
price. price.
2. Measures costs and benefits in terms of 2. Measures costs and benefits in terms of
consumption. uncommitted social income.
3. Stage-by-stage approach to 3. One stage approach to efficiency, savings
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efficiency, savings and redistribution and redistribution considerations.
 6. MANAGING PROJECT RISK
Project risk management is an important aspect of project management.

Project risk management is the process of identifying, analyzing and then

responding to any risk that arises over the life cycle of a project to help the project
remain on track and meet its goal. Risk management isn’t reactive only; it should be
part of the planning process to figure out risk that might happen in the project and
how to control that risk if it in fact occurs.

According to Project Management Institute, “Risk management is one of the

knowledge areas in which a project manager must be competent.”

Project risk is defined by PMI as, “an uncertain event or condition that, if it occurs,
has a positive or negative effect on a project’s objectives.”

Good Project Risk Management depends on supporting organizational factors, having

clear roles and responsibilities, and technical analysis.
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 6. MANAGING PROJECT RISK
Project risk management, includes the following five steps:
1. Planning risk management

2. Risk identification
 Key risk symptoms
 External sources

3. Performing qualitative risk analysis

 Critical-will cause the total failure of one or more parts of a projects?
 Major-will hold up or increase costs in one or more areas?
 Minor-will cause inconvenience but not set the project back financially or in time?

4. Planning risk response (Response control/mitigation)

 Risk avoidance: Risk avoidance usually involves developing an alternative strategy that has
a higher probability of success but usually at a higher cost associated with accomplishing a
project task.
 Risk sharing: Risk sharing involves partnering with others to share responsibility for the
risk activities.
 Risk reduction: It is an investment of funds to reduce the risk on a project.
 Risk transfer: It is a risk reduction method that shifts the risk from the project to another
party.

5. Monitoring and controlling risks 24

 6. MANAGING PROJECT RISK
In conclusion, managing risks on projects is a process that includes risk assessment
and a mitigation strategy for those risks. Risk assessment includes both the
identification of potential risk and the evaluation of the potential impact of the risk.
A risk mitigation plan is designed to eliminate or minimize the impact of the risk
events-occurrences that have a negative impact on the project. Identifying risk is
both a creative and a disciplined process. The creative process includes
brainstorming sessions where the team is asked to create a list of everything that
could go wrong. All ideas are welcome at this stage with the evaluation of the ideas
coming later.

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 7. MANAGING PROJECT QUALITY
Quality is one of four pillars of project management, with scope, schedule and
cost. Quality management is the process for ensuring that all project activities
necessary to design, plan and implement a project are effective and efficient with
respect to the purpose of the objective and its performance.
Project quality management is the process through which quality is managed and
maintained throughout a project. Project quality management is all of the process
and activities needed to determine and achieve project quality.
In order to manage project quality, we have to follow this steps:
A Good Plan

Appropriate Communication

Manage Stakeholders

Good Measurement

Constant Review

Act Early
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 6. MANAGING PROJECT QUALITY
1. A Good
Plan
The Plan, Do, Check, Act cycle is fundamental to achieving project quality. The
overall project plan should include a plan for how the project manager and
team will maintain quality standards throughout the project’s cycle.

2. Appropriate Communication
Despite good project planning and scheduling, poor or absent communication
with team members and stakeholders can bring a project undone. Project
managers need excellent communication skills and a comprehensive scheme
that encourages formal and informal discussion of expenditures, innovation,
progress and results.

3. Manage Stakeholders
Stakeholders include everyone who has an interest in, can influence or is
affected by the project’s implementation or outcomes. To engage stakeholders,
identify who they are, analyse their concerns and what they need to know, and
then prepare a strategy to provide the appropriate amount of information and
opportunities for involvement.

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 6. MANAGING PROJECT QUALITY
4. Good Measurement
Early in the process it is important to identify the key outcomes and outputs of
the project and how you will measure whether they have been delivered.
Implement processes that measure progress, both qualitatively and
quantitatively, throughout the project at individual, team and whole project
levels, this ensures that problems can be identified early and successful tactics
can be promulgated throughout the project.
5. Constant Review
Along with good measurement go good review mechanisms. Successful project
managers diligently (carefully, thoroughly) and regularly review progress against
the schedule, budget and quality elements of the project. Regular review allows
problems to be identified early so that corrective action can be taken to keep the
project on track. Review also helps team members to learn and improve their
skills.
6. Act Early
Measurement and review are important but they are effective if the project
manager takes action on issues identified. Leaving problems to be fixed up later
is a recipe (formula, method, way, procedure) for disaster. Simple issues should be
addressed immediately. More complex issues should be added for action into the
project plan and resources allocated to address them. 28
 8. REASONS FOR SUCCESS AND FAILURE PROJECT

Here are some of the points which considers the project to be

successful:
• Have satisfied stakeholders?
• Meet the project’s objectives/requirements.
• Meet an agreed budget.
• Deliver on time.
• Add value.
• Meet quality requirements.
• Sense of professional satisfaction for the team.

Here are some of the reasons for success and failure of the project:
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 8. REASONS FOR SUCCESS AND FAILURE PROJECT
1. Planning and/or adequate process
Planning is central to the success of a project. It is important to define what
constitutes project success or failure at the earliest stage of the process. It is also
essential to drill (practice, exercise) down the big picture to smaller tasks.

2. Documenting and tracking progress

This is an oversight on the part of the project manager. Tracking milestones is a
crucial way to see if expectations are being met. Documentation and tracking also
lets the manager identify which area require more resources to be completed on
time.

3. Leadership at any level

The “leader” is usually identified as the project manager. However, the
management-level executive also has a responsibility of ensuring the project’s
success. He/she should work together with the manager to ensure that the
company’s exact requirements are understood.

4. Setting expectations and managing them

In working in a team setting, it is critical that you’re able to manage people. If and
when expectations are not met, there should be clearly-defined consequences. The
task should then be prioritized and possibly reassigned to a more competent
individual. 30
 8. REASONS FOR SUCCESS AND FAILURE PROJECT
5. Trained project managers
The project manager is taking on a heavy responsibility. It is important to assign
management roles only to individuals who have the capabilities to meet
requirement. In some cases, poorly-trained managers are assigned to complex
projects; this is a recipe for failure.

6. Cost estimation
There are instances when the cost of an undertaking is grossly underestimated.
When it runs out of resources, the project cannot be completed. This can be
mitigated when the lack of resources is identified early by the project manger.

7. Communication at any level

Communication between the management executive and the project manager, and
between the latter (final, end, conclusion) and the team members are always
important. Everyone should feel to come forward to state their concern or give

suggestions. 31
 8. REASONS FOR SUCCESS AND FAILURE PROJECT

8. Culture or ethical alignment

The culture of the company must prize competence, pro-activeness, and
professionalism. If it doesn’t, the team members may not have the motivation to do
their best. In essence, everyone involved must be concerned about the success of
their understanding.

9. Competing priorities
When a company’s resources are stretched, there will be competing priorities in
terms of manpower and financing. Having good cost estimation at the start will
eliminate this problem.

10. Project warning signs

When a project is on the verge of failing, there will always be warning signs.
Taking action immediately can save the project. Otherwise, the whole endeavor can
just go down the drain.

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