Project Planning - 1

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Project Planning - 1
Lecture-4
Presented byM. A. Kamal, Ph.DDirector
GeneralNational Academy for Planning
Development
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Outlines

1. Introduction
2. Objectives of Project Appraisal
3. Scope of Project Appraisal
4. Methods of Calculating Profit Worthiness
5. Formula for
6. Acceptability Criteria
7. The basic Difference between Financial Appraisal
   Economic Appraisal
8. Types of Project Appraisal
9. Conclusion.

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1. Introduction

• 1.1 Project Appraisal Pre-Investment
  Analysis/Ex-ante Analysis.
• 1.2 Project Evaluation Post-Implementation
  Analysis/ Ex-post Analysis.

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Project Appraisal

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

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2. Objectives of Project Appraisal

• 2.1 Project Appraisal is necessitated because
  resources or means are Limited as compared to the
  needs of the society.
• 2.2 As a result, any investment undertaken
  implies depriving other projects resources.
• 2.3 Each project is appraised before investment
  decision so that scarce resources are utilized in
  the best possible ways.
• 2.4 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 (socio-economic benefits).
• 2.5 For ensuring economic use of resources we
  have to appraise each project very minutely from
  different angles.
• (Cont.)

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• 2.6 Project Appraisal involves detailed
  pre-investment analysis of market technical
  feasibility, financial soundness, economic
  desirability and, finally, measuring its
  investment worth.
• 2.7 The task aims mainly at ensuring that scarce
  resources are put to most effective use.
• 2.8 It requires the combined efforts of a team of
  persons from various disciplines (engineers,
  financial analysts, economists etc.) working in
  close, co-ordination.

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3. Scope of Project Appraisal

• 3.1 Market Feasibility study.
• 3.2 Technical Feasibility / viability.
• 3.3 Financial Soundness.
• 3.4 Management and Organizational Aspects /
  Managerial Soundness.
• 3.5 Economic viability / Appraisal.
• 3.6 Environmental Appraisal / Viability.

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3.1 Market Feasibility

• Whether sufficient demand does exist?
• b) In case of import substitution whether
  domestic cost of production is less than cost of
  import.

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3.2 Technical Appraisal

1. Availability of inputs at reasonable cost.
2. Consistency soundness of engineering design.
3. Economics of scale in production.
4. Appropriate technology alternative ways of
   production.
5. Advantageous Location of the project.
6. Maintenance Repairs.
7. Provision for expansion.
8. Balancing of equipment

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3.3 Financial Soundness

• Exhaustive realistic cost estimation
• Sound capital structure Fund Source
• Provision for working capital requirement
• Generation of sufficient cash flow to cover
  debt-service Liability.
• Generation of adequate profit.
• Safety margin.
• Break- Even Point
• Pay back period.
• Pay back period Pay back period is a measure of
  Projects Capital recovery. It is defined as the
  Length of time it takes to recover the initial
  investment of a Project.

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3.4 Managerial Soundness

1. Experience of the top managerial personnel in the
   line.
2. Expertise and ability of supervisory staff
   members.
3. Balance between supervisory staff and work
   forces.
4. Clarity of job description, responsibility and
   accountability.

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3.5 Environmental Aspects

• The environmental impacts include
• Ecological Fisheries, Tree Plantation, Wet Land
  / Wet Land Habitat, Forest.
• 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,
  Land values.

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3.6 Measurement of Investment Worthiness

• What benefit does the project promise for its
  sponsors or owners?
• What benefit does the project promise for the
  national economy?
• The satisfactory answers to these questions
  provide the prime test of a projects
  acceptability.

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4. Methods of Calculating Profit Worthiness.

• 4.1 Net Present Value NPV
• 4.2 Benefit Cost Ratio B/C Ratio
• 4.3 Internal Rate of Return IRR

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5. Formula for

• 5.1 NPV Discounted Total Benefits Discounted
  Total costs.
• 5.2 B/C Ratio Discounted Total Benefits
• Discounted Total costs

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5.3 Formula for IRR

• NPV
• 3. IRR LRD LRD x ( HRD LRD )
• NPV - NPV
• LRD HRD
• Where,
• LRD Lower Rate of Discount at which NPV is
  positive
• HRD Higher Rate of Discount at which NPV is
  negative
• NPV Net Present value at the Lower Rate of
  Discount
• LRD
• NPV Net Present value at the Higher Rate of
  Discount.
• HRD
• 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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Year Cost Benefit 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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6. Acceptability Criteria

• 6.1 NPV (Net Present Value) if NPV gt
  0 ACCEPT
• if NPV lt 0 REJECT
• if NPV 0 AMBIGUOUS
• 6.2 BCR (Benefit Cost Ratio) if BCR gt I ACCEPT
• if BCR lt I REJECT
• if BCR I AMBIGUOUS
• 6.3 IRR (Internal Rate of Return) if IRR gt
  r ACCEPT
• if IRR lt r REJECT
• if IRR r AMBIGUOUS\
• r MARKET RATE OF INTEREST

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7. The basic difference between Financial
Appraisal Economic Appraisal
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8. Types of Project Appraisal

• 8.1 Financial / commercial Appraisal
• 8.2 Economic Appraisal
• 8.3 Technical Appraisal
• 8.4 Social Appraisal.

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9. Conclusion

• 9.1 Project appraisal is the basic criterion of
  selecting a project.
• 9.2 Objectives of project appraisal are to
  measure the different worthiness of a project
• 9.3 Scope is wide and essential
• 9.4 Environment impact is crucial in project
  implementation.
• 9.5 Measurement of investment worthiness are
  principal decision making tools.
• 9.6 Positive signal is the key to successful
  selection of a project.

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