Project Appraisal

Concept of Project Appraisal

It is the analysis of costs and benefits of a proposed project with the goal of assuring a rational allocation of limited funds among alternatives investment oppurtunities in view of achieving certain specified goals. It is ex-ante analysis. It identifies and values the expected costs and benefits of a project. Project evaluation is ex-post analysis of an executed project.

Methods of Project Appraisal

Payback Period Average Rate of Return Net Present Value Benefit-cost Ratio Internal Rate of Return Apart from these a public sector project is appraised employing Social Cost Benefit Analysis so as to highlight its significance to nations economy or society.

Cash flows as costs and benefits

Generally the resources committed to an investment proposal are referred to as its costs and gain or income derived from it over a future period as benefits. Costs are cash outflows and benefits are cash inflows.

Pay Back Period

The payback period is the length of time required to recover the initial cash outlay on the project.

Forex: If a project involves a cash outlay of Rs 200000 and the annual cash inflows are Rs. 50000, Rs.80000, Rs 60000 and Rs 40000 during its economic life of four years , the payback period is 3.25yrs. During 3 yrs and the three months , the project cost can be recovered with the cash inflows. Hence it is the payback period. If the above mentioned project return constant annual cash inflows of Rs 80000 for four years then the payback period is 2.5yrs (Rs 200000/ Rs 80000). Formula Original cost of Investment Payback Period = Annual cash inflows

Selection criteria
Among the mutually exclusive or alternative projects whose PBs are lower than the cutoff period, the project with the shorter PB would be selected. For payback period of 4yrs the payback ratio is . Thus larger the payback ratio, better the project.

Suitability
1 When the project has shorter gestation period and the project cost is small. 2 When a firm suffers from shortage of cash and depends on internal generation of cash. 3 It also suitable when the project belongs to high risk category. 4 Suitable for deciding upon overseas investments when there is political uncertainty in such countries.

Merits
1 It is easy to operate and simple to understand. 2 This method is preferred on the ground that returns beyond three or four years are so uncertain that it is better to disregard them altogether in a planning decisions. 3 This method is also useful to a concern which is short of cash and is eager to get back the cash invested in a capital expenditure project. 4 The results comparatively more accurate.

Demerits
1 It does not consider the earnings beyond the payback period. 2 This method is that it ignores the time value of money.