Daffodil Internationational University
Department of Electrical and Electronics Engineering
Course Teacher : Slide Courtesy:
Course Name : Md. Sakib Hossain
Liakat Omar Rihan BSc. (EEE, CUET), MSc. (CSE, JU)
Project Management and Finance BSc. (EEE, BUET)
Asst. Professor (Part Time)
Lecturer Head of NPD & Projects
Course Code : 0713 – 213C/D EEE, DIU Rahimafrooz Storage Power Business
Topic : L2
Project Apprisal
Assess project needs, complexity, and magnitude
Assess project feasibility study
Reference Book
Project Appraisal
Project appraisal means pre-investment analysis of a project with a view to
determining the overall feasibility and measures its investment worth
Major components
• Market Feasibility Viable
• Technical Feasibility Available
• Managerial Feasibility Manageable
• Financial Feasibility Profitable
• Economic Feasibility Sound
• Social/Environmental Feasibility Sustainable
Market Feasibility
What product? How does one learn about the product?
• Product Characteristics • Forms of promotion
• Market susceptibility
• Product Classification
• Product Uses How much one is prepared to pay?
• Price change
Who wants the product and why?
• Price elasticity
• Market size and structure
o Consumer goods Who are the competitors?
o Industrial goods • Manufactured locally
• Composition of demand • Imported
o New vs. replacement demand • Substitute
Where does he want the product? Government policies:
• Distribution channels, Structure • On production/consumption
• Type of intermediaries • On Import/Export
• Existing distribution practices • Taxes/Subsidies
Technical Feasibility
❖ Capacity and product mix
❖ Technology/technology factor
❖ Manufacturing process ❖ Installation of machinery
❖ Land and location ❖ Operation of machinery
❖ Building (existing/proposed) ❖ Utilities: Electricity/Water/Gas
❖ Machinery/Equipment ❖ Raw material
❖ Repair/maintenance
❖ Store/spares
❖ Safety measures
❖ Waste disposal
Others Feasibility
Managerial Feasibility Economic Feasibility
• Organizational structure • Constraints facing the economy
• Operational system • Key sector analysis
• Manpower requirements/qualifications • Economic costs and benefits
• Capability/buildups • Economic assessment
• Organizational culture • Multiplier effects
Social/Environmental Feasibility Financial Feasibility
• Socio-cultural/religious/demographic • Magnitude of capital/operating cost
characteristics • Financial plans and budgets
• Social acceptability • Sourcing and timing of budget
• Ecological effects • Financial statement
• Social/environmental strategies • Financial viability
• Sensitivity analysis
Project Apprisal
Return on Investment (ROI)
Return on investment (ROI) is a financial ratio used to calculate the benefit
an investor will receive in relation to their investment cost. It is most
commonly measured as net income divided by the original capital cost of
the investment.
ROI= Net income
Total Cost of Investment
Decision Rule: -
The higher the ratio, the greater the benefit earned, is considered to be the
most ACCEPTABLE.
Return on Investment (ROI)
Problem : An investor purchases property A, which is valued at $500,000.
Two years later, the investor sells the property for $1,000,000.
We use the investment gain formula in this case.
ROI = (1,000,000 – 500,000) / (500,000) = 1 or 100%\
Year Cash Flow Balance
ROI = (150000-100000)/100000*100% 0 -1,00,000 -1,00,000
= 50%
1 30,000 -70,000
2 35,000 -35,000
3 40,000 +5,000
4 45,000
Pay Back Period
The Pay-Back Period is the length of time required to recover the initial
outlay on the project Or It is the time required to recover the original
investment through income generated from the project.
Pay-Back Period = Total Cost of Investment
Annual Cash Inflows
Decision Rule: -
A project which gives the shortest pay-back period, is considered to be the
most ACCEPTABLE.
Pay Back Period
Example :
45,000/- Year Cash Flow Balance
35,000/- 40,000/-
0 -1,00,000 -1,00,000
30,000/-
1 30,000 -70,000
2 35,000 -35,000
3 40,000 +5,000
Tk. 1,00,000/- 4 45,000
Pay Back Period = 3 yrs
Pay Back Period
Example:
If a Project involves a cash outlay of BDT 2,00,000 and the Annual Cash inflows are
BDT 50,000, 80,000, 60,000, and 40,000 during its economic life of 4 years.
Here, Pay-Back Period = 3 years + 10,000 Year Year Cash Flow Balance
40,000 0 -2,00,000 -2,00,000
1 50,000 -150,000
Pay-Back Period = 3 years + 0.25 Year 2 80,000 -70,000
= 3 years and 3 months. 3 60,000 -10,000
4 40,000 30,000
Accounting Rate of Return
It considers earnings of the project during its full economic life. It is mainly
expressed in terms of percentage.
ARR = Average Annual Income * 100
Average Investment
Here, Average Investment = (Initial Cost + Salvage Value) * 1 / 2
Decision Rule: -
In the ARR, A project is to be ACCEPTED when ARR is higher or greater than the
rate of return (IRR) otherwise it is Rejected and In case of alternate projects,
One with the highest ARR is to be selected.
Accounting Rate of Return
Problem : XYZ Company is considering investing in a project that requires an
initial investment of $100,000 for some machinery. There will be net inflows of
$20,000 for the first two years, $10,000 in years three and four, and $30,000 in
year five. Finally, the machine has a salvage value of $25,000. Calculate ARR.
Solution :
Cash Inflow/Gross Income/Earning = $20,000*2+$10,000*2+$30,000
= $90,000
Depreciation = $100,000 – $25,000 = $75,000
Net Income = $90,000 – $75,000 = $15,000
Average annual Income = $15,000/5 = $3,000
Average Investment/ Cash outflow = ($100,000+$25,000)/2 = $62,500
ARR= Average annual income/ Average investment
= $3,000/$62,500
= 4.8%
Accounting Rate of Return
Problem : XYZ Company is looking to invest in some new machinery to replace
its current malfunctioning one. The new machine, which costs $420,000, would
increase annual revenue by $200,000 and annual expenses by $50,000. The
machine is estimated to have a useful life of 12 years and zero salvage value.
Calculate ARR.
Solution :
Cash Inflow/Gross Income/Earning = $200,000*12 = $24,00,000
Expense = $50000*12 = $600,000
Depreciation = $420,000 – 0 = $420,000
Net Income = $24,00,000 – $600,000 - $420,000 = $13,80,000
Average annual Income = $13,80,000/12 = $115,000
Average Investment/ Cash outflow = ($420,000+$ 0)/2 = $210,000
ARR= Average annual income/ Average investment
= $115,000/$210,500
= 54.76%
Accounting Rate of Return
Problem : Project A Project B
Investment 25,000 37,000
Expected Life (In Yrs.) 5 5
Net Earnings (After Dep. & Taxes)
Years
1 2500 3750
2 1875 3750
3 1875 2500
4 1250 1250
If the Desired rate of return is 12%, which project should be selected?
Net Present Value (NPV)
This method mainly considers the time value of money. It is the sum of the
aggregate present values of all the cash flows – positive as well as negative –
that are expected to occur over the operating life of the project.
NPV = PV of Net Cash Inflows – Initial Outlay (Cash outflows)
Decision Rule: -
If NPV is positive, ACCEPT
If NPV is negative, REJECT
If NPV is 0, then apply Payback Period Method
Net Present Value (NPV)
Year Cash Flow Present Value @ 10%
0 -1,00,000 -1,00,000
n
1 30,000 27273 Ct
2 35,000 28926 ∑ (1+ r
t =1
3 40,000 30053 )t
4 45,000 30736
Profit 50,000 16,988
NPV = 16,988/-
Net Present Value (NPV)
Problem : Initial Investment – 20,000, Estimated Life – 5 years, Scrap Value – 1000
XYZ Enterprise’s Capital Project
Year Cash flow Discount factor Present Value
0 -20,000 @10% - 20,000
1 5.000 0.909 4,545
2 10,000 0.826 8,260
3 10,000 0.751 7,510
4 3,000 0.683 2,049
5 2,000 0.621 1,242
5 1,000 0.621 621
PV of Net Cash Inflows = 24,227
NPV = PV of Net Cash Inflows – Cash Outflows
= 24,227 – 20,000
= 4,227
Here, NPV is Positive (+ ve) The Project is ACCEPTED.
Profitability Index (PI)
Profitability Index is the ratio of present value of expected future cash inflows
and Initial cash outflows or cash outlay. It is also used for ranking the projects in
order of their profitability. It is also helpful in selecting projects in a situation of
capital rationing. It is also known as Benefit - Cost Ratio (BCR).
PI = Present value of Future cash Inflows
Initial Cash Outlay
Decision Rule: -
In Case of Independent Investments, ACCEPT a Project If a PI is greater ( > 1 ) and
Reject it otherwise.
In Case of Alternative Investments, ACCEPT the project with the largest PI,
provided it is greater than ( > 1 ) and Reject others.
Profitability Index (PI)
Problem- In Case of previous Illustration: -
Here PI = Present Value of Cash Inflows
Present Value of cash Outflows
= 24227
20000
= 1.21
Here, The PI is greater than ONE ( > 1 ), so the project is accepted.
Discounted pay back period
Discounted Pay Back Period:
Cash flows at different time period is converted into
present value
Year Cash Flow Present Value @ 10% Balance
0 -1,00,000 -1,00,000 -1,00,000
1 30,000 27273 -72,727
2 35,000 28926 -43,801
3 40,000 30053 -13748
4 45,000 30736 +16988
Discounted Pay Back Period = 4 yrs
Internal Rate of Return (IRR)
Internal Rate
Internal ofof
Rate Return:
Return:
he discount rate which
The discount rateequates
which the present
equates thevalue of cash
present inflows
value with the
of cash inflows with the
resent value of
present cashofoutflows,
value i.e., NPV
cash outflows, i.e.,isNPV
zerois zero
30,000 35,000 40,000 45,000
NPV = (1+ r + (1+ r)2+ (1+ r )3+ (1+ r −1,00,000 = 0
) )4
Total Total
Present Value
Present Valueof
ofCash Inflow
Cash Inflow = Total
= Total Present
Present Value
Value of of Cash Outflow
Cash Outflow
30,000 35,000 40,000 45,000
(1+ r +(1+ r )2 +(1+ r )3 +(1+ r =1,00,000
) )4
For risky project, IRR = 15~30%
For less risky project = 8~15%
Thank You