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Project Conception and Appraisal

Unit-III
Market Appraisal

• What would be the aggregate demand of the proposed product or service?

• What would be the market share of the project under appraisal?


Market Appraisal issues

• Past and Current demand trends


• Past and current supply position
• Production possibilities and constraints
• Imports and exports
• Nature of competition
• Cost structure
• Elasticity of demand
• Price-demand variability, essential and luxurious goods
Market Appraisal issues…contd

• Consumer behavior

• Distribution channels

• Administrative, technical and legal constraints


Technical Appraisal

• Whether pre-requisites for the success of project considered?

• Good choices with regard to location, size, process, machines etc.


Technical Appraisal (Issues)

• Preliminary tests and studies


• Availability of raw materials, power and other inputs.
• Optimal scale of operations
• Choice of suitable production processes
• Quality aspects
• Choice of appropriate machines and equipment
• Effluents and waste disposal
• Ex. Height of chimney to dispose smoke.
Technical Appraisal (Issues)..Contd

• Proper layout of plants and buildings


• Ex. Movement of man, materials etc.
• Realistic work schedules
• Socially acceptable technology
Economic Appraisal

• Social cost -benefit analysis


• How the project is going to affect the society at large, opportunities of employment etc.
• Benefits and cost at social level

• Direct economic benefits and costs in terms of shadow prices


• What is the contribution of increasing that particular resource level to the overall objective
• Ex. benefit of occupying too much of land in a project to the overall objective, is the
benefit more than cost?

• Impact of project on distribution of income in society


• Ex. Large government project
Economic Appraisal…..contd

• Impact on level of savings and investments in society

• Impact on fulfillment of national goals :


• Self sufficiency
• Ex ISRO project for missile development
• Employment
• Social order
Ecological Appraisal

• Impact of project on quality of :-


• Air
• Water
• Noise
• Vegetation
• Human life
Ecological Appraisal..contd

Major projects ,that may cause environmental damage

• Power plants

• Industries like bulk drugs, chemicals and leather processing.

• Likely damage & the cost of restoration


• Ex effluents thrown into river , should be reprocessed
Financial Appraisal
• Estimation of cost of the project and its timing.

• Estimation of the likely revenues during each period

• Whether the project is financially viable ?


 Servicing debt
• Ex project has the capability to repay back loans.

 Meeting return expectations


• Investment and Phasing of project.
• Investments are to be done in one go or subsequent phases during project period
Financial Appraisal ….contd

• Means of financing the projects/ sources to raise the funds

• Level of risk as evidenced by the worst and best values of cost and revenues

• Cost of capital
• Source/ Interest rate

• Projected profitability

• Breakeven point

• Cash flows in the project


Financial Criteria of Interests

• Investment worthwhile ?
• Net present value (NPV)
• Internal rate of return (IRR)
• Payback period
• Loan returning capability
• Debt service coverage ratio (>2- desirable)
Sample Project
Suppose a project has the following data:

• Initial investment (I) = Rs 3,00,000

• Annual costs of operation =Rs 20,000

• Expected annual revenues

• Rs 1,00,000 per annum for the first two years


• Rs 200,000 per annum for the next three years

• Planning horizon of 5 years

• Salvage value = zero


NPV= 400 (in thousands)
Discount factor = (1/(1+i))n

DCF= Cash flow * DF


Summary
• Role of financial appraisal of a project in conjunction with market, technical,
economic and ecological analyses in producing the project feasibility report.

• Vital role of Financial appraisal in overall project evaluation.

• Estimation of investment, yearly costs and revenues to obtain gross cash flows.

• Computation of NPV, IRR, benefit/cost ratio and payback.