Development project appraisal for sustainable development

LECTURE:06

Development Project Appraisal
for sustainable development
M. A. Kamal, Ph.D
Director General
National Academy for Planning and Development
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Outline:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.

Introduction
Definition of a Project
Types of Project
Project Cycle
Project Appraisal

Objectives of Project Appraisal
Scope of Project Appraisal
Methods of Calculating Profit Worthiness
Exercise
Acceptability Criteria
The basic difference between Financial Appraisal
&Economic Appraisal
Types of Project Appraisal
Conclusion
Farewell Call
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1. Introduction:
1.1 Development projects impose
a series of costs and benefits
on recipient communities or
countries.
1.2 Those costs and benefits can
be social, environmental, or
economic in nature, but may
often involve all three.
1.3 Irrigation
projects
may
facilitate the growing of cash
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2. Definition: Project

2.1
A Project is a set of
interrelated
investment
activities to attain certain
specific objectives by utilizing
limited
resources within a
particular period of time.
– Investment Activities
– Specific objective
– Limited Resources

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3.

Projects types:

Projects are:
3.1 Type ‘x’ : Self financing projects i.e. projects which
earn revenue through sale of output (goods &
services). These are called directly productive
projects,
i.e.. Industrial Projects.
3.2 Type “y” : In directly productive but non-revenue
earning projects, i.e., projects which give rise to
tangible output, benefit of which do not accrue
directly to projects themselves but to other parties

Example: Irrigation Projects, Roads, Bridge etc.
3.3 Type “z” : Service Sector Projects Projects which do
not give rise to tangible output but provide service
benefits to the society.
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Example: School, College, Hospital, Training


4.

Projects Cycle

4.1 There tends to be a natural sequence in the way
projects are planned and carried out and this
sequence has come to be known as ‘ the Project
Cycle’.
4.2 Project Cycle Covers following stages:
I.
II.
III.
IV.
V.
VI.

Project Identification.
Project Preparation & Analysis
Project Approval / Negotiation
Project Appraisal
Project Implementation & Monitoring
Project Evaluation & Follow-up Analysis.

4.3 A Project generally goes through all these phases
sequentially from identification to evaluation &
follow-up. This sequence has come to be termed or
referred to as “Project Cycle”
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4.4 Project Cycle
Identification

Evaluation

Preparation

Implementation
& Monitoring

Appraisal

Approval
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5. Project Appraisal
5.1

5.2
5.3

Project Appraisal involves the comparison
of costs and benefits. If benefits exceeds
costs, the project could be considered for
acceptance Otherwise, it is not.
The basic principle in appraisal / CBA is
for potential acceptance of a project.
Project Appraisal means a pre-investment
analysis of a project to determine whether
the project should be implemented or not.
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6.

Objectives of Project Appraisal

6.1

Project Appraisal is necessitated because the resources or
means are limited as compared to the needs of the society.

6.2

As a result, any investment undertaken implies depriving
other projects resources.

6.3

Hence, it is very important to appraise each project before
investment decision so that scarce resources are utilized in

the best possible ways.

6.4

In other words, before allocation of resources for a
particular project, the decision making authority must
convince itself that the proposed project is the best and
most economical way of achieving the desired objective (in
terms of socio-economic benefits).

6.5

For this and for ensuring economic use of resources, we
have to appraise each project very minutely from different
angles.
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6. Objectives of Project Appraisal
6.6

6.7

6.8

A Project Appraisal involves detailed preinvestment analysis of market & technical
feasibility, financial soundness, economic
desirability and, finally, measuring its
investment worth.
The task aims mainly at ensuring that

scarce resources are put to most effective
use.
It requires the combined efforts of a team
of persons from various disciplines such
as
engineers,
financial
analysts,
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economists, etc. working in close co-


7. Scope of Project Appraisal
7.1 Market Feasibility study.
7.2 Technical Feasibility / viability.
7.3 Financial Soundness.
7.4 Management and Organizational
Aspects / Managerial Soundness.
7.5 Economic viability / Appraisal.
7.6 Environmental Appraisal /
Viability.

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7.1 Market Feasibility
a) Whether does a sufficient demand
exist?
b) In case of import substitution,
whether the domestic cost of

production is less than the cost of
import.
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7.2 Technical Appraisal
a. Availability of inputs at reasonable cost.
b. Consistency & soundness of engineering
design.
c. Economics of scale in production.
d. Appropriate technology & alternative
ways of production.
e. Advantageous location of the project.
f. Maintenance & Repairs.
g. Provision for expansion.
h. Balancing of equipment
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7.3 Financial Soundness
a.
b.
c.
d.
e.
f.
g.
h.

Exhaustive & realistic cost estimation

Sound capital structure: Fund Source
Provision for working capital requirement
Generation of sufficient cash flows to cover debtservice liability.
Generation of adequate profit.
Safety margin.
Break- Even Point
Pay back period.

 Pay back period: Pay back period is a measure
of Project’s Capital recovery. It is defined as the
length of time it takes to recover the initial
investment of a Project.

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7.4 Managerial Soundness
a. Experience of the top
managerial personnel in the line.
b. Expertise and ability of
supervisory staff.
c. Balance between supervisory
staff and workers
d. Clarity of job description,
responsibility and
accountability.
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7.5 Environmental Aspects

The
environmental
include –

impacts

a. Ecological :
Fisheries, Tree Plantation, Wet
Land / Wet Land Habitats, Forests.
b. Physico- Chemical : Flood Control & Drainage
Erosion, Drainage, Congestion / Water Logging,
Obstruction to waste water Flow, Soil Fertility,
Early Flooding.
c. Human Interest : Areas of Settlements,
Agricultural
Lands,
Navigation
/
Boat
Communication, irrigation Facilities, Landscape,
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Land values.


7.6 Measurement of Investment Worthiness

a. What benefit does the project
promise for its sponsors or
owners?
b. What benefit does the project

promise
for
the
national
economy?
c. The satisfactory answers to
these questions provide the
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8. Methods of Calculating Profit
Worthiness.
8.1 Net Present Value = NPV
8.2 Benefit Cost Ratio = B/C Ratio
8.3 Internal Rate of Return = IRR

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8.1 Formula for:
i) NPV = Discounted Total Benefits – Discounted Total
costs.

2.2 Formula:
ii) B/C Ratio = Discounted Total Benefits
Discounted Total costs

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8.3

Formula for IRR:
NPV

iii) IRR = LRD +

LRD
NPV
LRD

x ( HRD – LRD )
- NPV
HRD

Where,
LRD =
HRD =
NPV =
LRD
NPV =
HRD

Lower Rate of Discount at which NPV is positive;
Higher Rate of Discount at which NPV is negative;
Net Present value at the Lower Rate of Discount;
Net Present value at the Higher Rate of Discount.

What is IRR?
IRR = Internal Rate of Return is that rate of discount

that makes/ reduces the Net Present
Value
(NPV) of a project is to Zero.
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9.

Exercise:

Year

Cost

Benefi
t

Discount
Factor at
15%

Discounted
Cost

Discounted
Benefit

D.F at
25%

Discounted
Cost

Discounted
Benefit

0

200

-

1.00

200

-

1.00

200

-

1

60

160

.870

52.2

139.2

.800

48.00

128.00

2

60

160

.756

45.36

120.96

.640

38.40

102.4

3

60

160

.658

39.48

105.28

.512

30.72

81.92

337.04

365.44

317.12

312.32

NPV = DTB – DTC
NPV at 15% = 365.44 – 337.04
= 28.40
B/C at 15% = 365.44

337.04
= 1.08

NPV at 25% = 312.32 – 317.12
= - 4.8
IRR = 15 + 28.4
× (25 -15)
28.4 – (- 4.8)
= 15 + 28.4
× 10
28.4 + 4.8
= 15 + 28.4× 10
33.2
= 15 + 8.55
= 23.55
 IRR = 23.55%

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10. Acceptability Criteria
10.1 NPV (Net Present Value)

if
if
if

NPV > 0
NPV < 0
NPV = 0

ACCEPT
REJECT
AMBIGUOUS

10.2 BCR (Benefit Cost Ratio)

if
if
if

BCR > I
BCR < I
BCR = I

ACCEPT
REJECT
AMBIGUOUS

IRR > r
IRR < r
IRR = r

ACCEPT
REJECT
AMBIGUOUS\

10.3 IRR (Internal Rate of Return) if
if
if



r = MARKET RATE OF INTEREST

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11. The basic difference between Financial
Appraisal &Economic Appraisal

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12. Types of Project Appraisal
12.1
12.2
12.3
12.4

Financial / Commercial
Appraisal
Economic Appraisal
Technical Appraisal
Social Appraisal.
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13. Conclusion:
13.1

It involves comparison of costs and benefits.

13.2

Objectives of a project Appraisal are needed because
of limited resources, allocation of resources,
investment analysis, etc.

13.3

It involves Market, Technical, Financial, Management,
Economic and Environment Feasibilities.

13.4

It entails measurement of investment worthiness.

13.5

Methods of calculation of profit worthiness is highly
essential.

13.6

Acceptability criteria are needed.

13.7

Differences between Financial
Analysis's and required.

13.8

Finally, a project is appraised for investment.

and

Economic

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