SHRI GURU RAM RAI

UNIVERSITY
PATEL NAGAR DEHRADUN-248001

{Academic year 2021-23}

Department- Management

Name of assignment- Project Appraisal

SUBMITTED BY- SUBMITTED TO-

Rohan chauhan Dr. Pooja Jain

(CLASS- MBA 3rd semester)

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Project appraisal

Project appraisal is the process of assessing, in a

structured way, the case for proceeding with a project
or proposal, or the project's viability. It often involves
comparing various options, using economic appraisal or
some other decision analysis technique. The entire
project should be objectively appraised for the same
feasibility study should be taken in its principal
dimensions, technical, economic, financial, social and
so far to establish the justification of the project or project appraisal is the process
of judging whether the project is profitable or not to client or it is a process of
detailed examination of several aspects of a given project before recommending
of some projects.

 Why did Appraisal need in Project?

It is necessary because of multiple projects competing for limited resources, To

choose the best project, Appraisal is crucial.
 It is done for checking the viability of a project proposal.
 For detailed pre-investment analysis of the market and technical feasibility;
financial soundness, economic desirability, and finally, measuring its
investment worth.
 Decision-making for allocating scarce resources.
 To ensure scarce resources are put to the most effective use.
 To determine various costs and benefits of proposed actions.
 Helps to select the best project alternatives through questioning proposals
before resources are allocated.
 The feasibility study of the proposed project.
 Overall, leads to the project’s sustainability.
 Forms as the guideline for the new projects.

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 Types of appraisal

 Technical appraisal
 Project appraisal
 Legal appraisal
 Environment appraisal
 Commercial and marketing appraisal
 Financial/economic appraisal
 organizational or management appraisal
o Cost-benefit analysis
 Economic appraisal
o Cost-effectiveness analysis
o Scoring and weighting.

Social Cost Benefit Analysis (SCBA)

The social cost benefit analysis is a tool for evaluating the value of  money,
particularly of public investments in many economies. It aids in  decision making with
respect to the various aspects of a project and the  design programmes of closely
interrelated project. Social cost benefit analysis  has become important among
economists and consultants in recent  years.

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  Features of  Social Cost Benefit Analysis

 Assessing the desirability of projects in the public as opposed to the  private sector
 Identification of costs and benefits
 Measurement of costs and benefits
 The effect of (risk and uncertainty) time in investment appraisal
 Presentation of results – the investment criterion.

Little – Mirrlees Method (LM Approach)

The seminal work of Little and Mirrlees on benefit-cost analysis systematically develops
a theoretical basis for the analysis and its underlying assumptions and lays down step-wise
procedure for undertaking benefit-cost studies of public projects. The mathematical
formulation is identical to the UNIDO method except for differences in assigning value to
discount rates and accounting for imperfections and other market failures and social
considerations.
Little and Mirrlees have also suggested an elaborate methodology for calculating
shadow prices of non-tradable. Use of detailed input-output tables is suggested with a view to
tracing down the chain of all non-traded and traded inputs that go into their production.
However, in the case of non-availability of detailed input/output tables, a conversion factor
based on the ratio of domestic costs of representative items to world prices of these items
could be used for approximation of shadow prices of non-traded resources. Little and Mirrlees
believe that in all less developed countries, one of the major criteria for the choice of a project
should be its ability to generate savings and, hence, the Little-Mirrlees method suggests the use
of “accounting rate of interests” to calculate present worth of future annuities of savings and
consumption. Guidelines, on the other hand, do not make any adjustment for consumption and
saving impact of project investment.

 UNIDO approach

The UNIDO guidelines provide a comprehensive framework for appraisal of projects

and examine their desirability and merit by using different yardsticks in a step-wise manner.
The desirability is examined from various angles, such as the impact on

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  (a) financial profitability of utilization of domestic resources,

(b) savings and consumption pattern,

(c) Income distribution, and

 (d) production of merit and demerit goods.

 These different aspects are examined in five stages, each stage leading towards a

social benefit-cost of the project.

 Stage one

measures financial profitability from detailed integrated standard analytical tables enumerating
various costs and benefits at the market price and examines profit viability from investors’ point
of view.

 Stage two

adjusts the financial costs and benefits to various distortions introduced by market
imperfections by valuing costs and benefits or net benefits in terms of economic efficiency or
shadow prices. For shadow prices, it categorizes project inputs and outputs into “traded”,
“tradable” and “non -traded”. For traded and tradable, the guidelines use the border prices
(F.O.B/C.I.F) as the relevant shadow prices, whereas non-traded inputs and outputs are broken
down into their components and each tradable subcomponent is valued at border prices, and
so on. The residual non-traded components of commodities are valued at domestic willingness
to pay criterion and the labour is valued at shadow wage rate.

 Stage three

 This stage designed to examine the impact of projects on savings and consumption which are
of vital consideration in the choice of alternative investments in labour intensive and capital-
intensive projects. If saving is assigned great importance, as should be the case in capital-scarce
countries, this stage recommends the rate for adjustment for savings by which the social value
of a rupee/dollar investment exceeds its consumption value.

 Stage four

This important for those countries that regard income redistribution in favor of weaker sections
and backward regions as desirable objectives. The guidelines suggest weighting net benefits to
various income groups or regions that reflect the judgment of politicians or the planners.

 Stage five

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Finally, in stage five, the UNIDO analysis suggests a methodology for necessary adjustment of
the deviations in economic and social values and difference between the efficiency and social
value of project output, say, between good and bad or merit and demerit goods. It has been
claimed that the analysis of merit and demerit goods is not designed for “purists in economics
who think that economics should be devoid of political or subjective judgements” (UNIDO
1978).

CONCLUSION
Project appraisal is a multifaceted exercise. The backdrop of the exercise is provided by
the value system of the outside agency by or for whom appraisal is undertaken. The appraisal
compresses total evaluation of the performance ratings of the project. It covers technological,
financial as also socio-economic aspects of the project and presents to the decision-maker(s)
not a single figure or numerical value as a measure of the excellence of the project, but a set of
valuations embracing the total performance of the project. The project has to be assessed from
the point of view of the relationship it will have with other systems (including
environmental/ecological) with which it has to co-exist. It needs to be judged on technological
soundness. The output of the project has to have a target group. The project has, therefore to
be appraised with reference to the marketability of its output (commercial viability). The
project needs to generate adequate returns on capital invested. This calls for judgement from
the financial point of view. Projects generate certain spill-over effects. They give rise to spin
effects, besides providing goods or services; projects also serve as a means of modifying existing
income distributions in society. The impact which the project will have on the society at large
and various different strata of society (or groups) will also need to be assessed to obtain a total
comprehensive picture of the project. Project appraisal should include all the issues which have
a bearing on the decision-making process and for giving green signal for the project
implementation. Benefit-Cost analysis is one important aspect of the appraisal exercise. The
appraisal is the main tool utilized by investment planners to assess the comparative merits of
projects for diverse purposes. They have to be compared and ranked because of resource
constraints at any given point of time. It enables the decision-maker(s) in applying a uniform set
of yardsticks or criteria for measuring the relative performance of various competing projects,
and to assign priority to a set of projects for utilization of scarce resources.