Project preparation and appraisal

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Project preparation and appraisal
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Preparation of project report and appraisal are
intimately tied up
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Project identification
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• A project is a proposal for capital investment
  to develop facilities to provide goods and
  services (new unit, expansion or improvement of
  existing facilities)

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• Project idea can be conceived from input or
  output side

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• Input based projects
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• -          agricultural raw materials
• -          forest produce
• -          animal husbandry
• -          fishing products
• -          mineral resources
• -          human skills
• -          new technical process
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• Output based project
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• - Needs of the population
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• Steps of project selection

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• Preliminary selection stage
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• - 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
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• 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

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

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• Feasibility study provides additional information
  on
• - financing
• breakdown of cost of capital
• - cash flow

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

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• Feasibility study should contain
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• -          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

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• 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
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• 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

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• 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

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• 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

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• Appraisal
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• to analyse the soundness of project investment
  based on projections in terms of cash flow
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• Evaluation
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• to compare and evaluate alternative variants of
  technology, of raw materials to be used, of
  production capacity, and of local production
  versus import

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• Project selection can only be rational if it is
  superior to others in terms of commercial
  profitability or national profitability
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• Financial appraisal
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• -        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
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• Popular methods
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• simple rate of return methods
• pay back period

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• Discounted techniques
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• - Internal rate of return
• - NPV method

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• Financial analysis
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• -          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
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• 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
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• Project concept
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• comprises plant capacity, degree of integration,
  facilities for by product recovery and
  flexibility of the plant

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• Capacity of the plant
• Flexibility of the plant
• Flexible manufacturing system
• Evaluation of technology
• Inputs
• Location
• Interdependence of parameters of project
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• Economic appraisal - deals with impact of project
  on economic aggregates

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• Employment effect
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• Net Foreign Exchange effect

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