Project preparation and appraisal

Preparation of project report and appraisal are intimately tied up

Project identification

A project is a proposal for capital investment to develop facilities to provide goods and services (new unit, expansion or improvement of existing facilities)

Project idea can be conceived from input or output side

Input based projects -          agricultural raw materials-          forest produce-          animal husbandry-          fishing products-          mineral resources-          human skills-          new technical process 

Output based project 

- Needs of the population 

Steps of project selection

Preliminary selection stage - Decide whether a project idea should be studied in detail

-  What should be the scope of further studies- Findings are embodied in a pre-feasibility study or opportunity study 

Prefeasibility study 

-          Output of plant of economic size-          Raw material requirement-          Sales realization-          Total cost of production-          Capital input/output ratio-          Labour requirement Power and Infrastructural facilities

Project selection exercise should also ensure that it conforms to overall economic policy of the government

Feasibility study provides additional information on

- financing-breakdown of cost of capital- cash flow

Feasibility study is the final document in the formulation of a project proposal

Feasibility study should contain -          technical data-          economic data-          examination of public policy-          specification of output-          alternative techniques of production-          confirmation of ecology friendliness-          choice of raw material- choice of plant size

Feasibility study should contain….

 - choice of site location- layout plan along with a - list of buildings, structures and yard facilities by type, size and cost- list of major and auxiliary equipment by type, size and cost with sources of supply and process know-how and- list of supply stores and present estimates of costs for transportation of services, water supply and power  

Feasibility study should contain….

- detailed investigation of quality and dependence of raw material and their sources of supply - market analysis to establish and determine economic levels of output and plant size-  - financial data - estimates of sales revenue

Feasibility study should contain

-  - capital cost-  -  operating cost-  - profitability- - estimates of working capital requirements to operate the unit at viable level-  - schedule of implementation- estimates of expenditure during construction

Feasibility study is followed by project report firming up all the technical data. Project report is detailed plan to follow up project through various stages of implementation

Appraisal  to analyse the soundness of project investment based on projections in terms of cash flow 

Evaluation 

to compare and evaluate alternative variants of technology, of raw materials to be used, of production capacity, and of local production versus import

Project selection can only be rational if it is superior to others in terms of commercial profitability or national profitability 

Financial appraisal 

-        is concerned with assessing the feasibility of a new proposal for investment for setting up a new project or expansion of existing production facility-   is concerned with the measurement of profitability of resources invested in the project without reference to their sources 

Popular methods 

simple rate of return methods

pay back period

Discounted techniques

 - Internal rate of return- NPV method

Financial analysis 

-          Liquidity ratios-          Current ratio-          Acid test or quick ratio-          Debt equity ratio-          Fixed assets coverage ratio-          Debit coverage ratio-          Interest coverage ratio-          Break even point 

Technical appraisal - is concerned with project concept covering technology, design, scope and content of plant as well as inputs and infrastructure facilities envisaged for the project 

 

Project concept 

comprises plant capacity, degree of integration, facilities for by product recovery and flexibility of the plant

Capacity of the plantFlexibility of the plantFlexible manufacturing systemEvaluation of technologyInputsLocationInterdependence of parameters of project 

Economic appraisal - deals with impact of project on economic aggregates

Employment effect Net Foreign Exchange effect

Social cost benefit analysis - is concerned with examination of a project from the view point of maximization of net social benefits Market imperfectionExternalitiesRedistribution