What do you understand by PROJECT APPRAISAL? What are the methods?


What do you understand by  PROJECT APPRAISAL? What are the methods?

Ans.     Project appraisal means the assessment of a project. Project appraisal is made for both proposed and executed projects. In case of former project appraisal is called ex-ante analysis and in case of letter ‘post-ante analysis’. Here, project appraisal is related to a proposed project.
Project appraisal is a cost and benefits analysis of different aspects of proposed project with an objective to adjudge its viability. A project involves employment of scarce resources. An entrepreneur needs to appraise various alternative projects before allocating the scarce resources for the best project. Thus project appraisal helps select
the best project among available alternative projects. For appraising a projects its economic, financial, technical market, managerial and social aspect are analysed. Financial institutions carry out project appraisal to assess its creditworthiness before
extending finance to a project.
Method of Project Appraisal
Appraisal of a proposed project includes the following analyses :
1 Economic analysis
2 Financial analysis
3 Market analysis
4 Technical analysis
5 Managerial competence
6 Ecological analysis
Economic Analysis :
Under economic analysis the aspects highlighted include
Requirements for raw material
Level of capacity utilization
Anticipated sales
Anticipated expenses
Proposed profits
Estimated demand
It is said that a business should have always a volume of profit clearly in view which will govern other economic variable like sales, purchase, expenses and alike.
Financial Analysis
Finance is one of the most important prerequisites to establish an enterprise. It is finance only that facilitates an entrepreneur to bring together the labour, machines and raw materials to combine them to produce goods. In order to adjudge the financial viability of the project, the following aspects need to be carefully analysed :
Cost of capital
Means of finance
Estimates of sales and production
Cost of production
Working capital requirement and its financing
Estimates of working results
Break-even point
Projected cash flow
Projected balance sheet.
The activity level of an enterprise expressed as capacity utilization needs to be well spelled out. However the enterprise sometimes fails to achieve the targeted level of capacity due to various business vicissitudes like unforeseen shortage of raw material, unexpected disruption in power supply, instability to penetrate the market mechanism etc.
Market Analysis Before the production actually starts, the entrepreneur needs to anticipate the possible market for the product. He has to anticipate who will be the possible customer for his product and where his product will be sold. This is because production has no value for the producer unless it is sold. In fact, the potential of the market constitutes the determinant of possible reward from entrepreneurial career. Thus knowing the anticipated market for the product to be produced become an important element in business plan. The commonly used methods to estimate the demand for a product are as follows. :
1 Opinion polling method
In this method, the opinion of the ultimate users. This may be attempted with the help of either a complete survey of all customers or by selecting a few consuming units out of the relevant population.
2. Life Cycle Segmentation Analysis
It is well established that like a man, every product has its own life span. In practice, a product sells slowly in the beginning. Barked by sales promotion strategies over period its sales pick up. In the due course of time the peak sale is reached. After that point the sales begins to decline. After sometime, the product loses its demand and dies. This is natural death of a product. Thus, every product passes through its life cycle. The product life cycle has been divided into the following five stage : Introduction, Growth, Maturity, Saturation and Decline.  The sales of the product varies from stage to stage Time Period Considering the above five stages of a product life cycle, the sale at different stages can be anticipated.
Technical Analysis Technical analysis implies the adequacy of the proposed plant and equipment to prescribed norms. It should be ensured whether the required know how is available with the entrepreneur. The following inputs concerned in the project should also be taken into consideration.
􀂾 Availability of Land and site
􀂾 Availability of Water Power, transport, communication facilities.
􀂾 Availability of servicing facilities like machine shop, electric repair shop etc.
􀂾 Coping with anti pollution law
􀂾 Availability of work force
􀂾 Availability of required raw material as per quantity and quality.
Management Competence Management ability or competence plays an important role in making an enterprise a success. In the absence of Managerial Competence the project which are otherwise feasible may fail. On the contrary, even a poor project may become a successful one with good managerial ability. Hence, while doing project appraisal, the managerial competence or talent of the promoter should be taken into consideration.
Ecological Analysis
In recent years, environmental concerns have assumed great deal of significance. Ecological analysis should also be done particularly for major projects which have significant implication like power plant and irrigation schemes, and environmental pollution industries like bulk-drugs, chemical and leather processing. The key factors
considered for ecological analysis are :
􀂾 Environmental damage

􀂾 Restoration measure

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