Chapter 13

Project Appraisal

Like the new product development and introduction

process, business introduction too has different
stages. These can be classified into:
Stag
e

Step

Classification

Generation of business
ideas

Project identification and

Project classification

Identification of the
business opportunity

Project selection

Business opportunity
analysis through
feasibility studies

Project formulation or Project

analysis or
Project evaluation or
Project appraisal

Implementation of the
business opportunity

Project design or
Project Implementation

Presentation of report

Project Report

Classification of Projects
1. Quantifiable and non-quantifiable projects
2. Sectoral Projects
a.
b.
c.
d.
e.
f.

Agriculture and allied sector

Irrigation and power sector
Industry and mining sector
Transport and communication sector
Social services sector
Miscellaneous sector

3. Techno-Economic Projects
a.
b.
c.

Intensity factor is used as base for classification such

as capital-intensive and labor intensive.
Cause based oriented projects- export generation,
employment generation
Magnitude of investment and operations based
projects-large, medium, small and tiny

Classification of Projects (contd)

4. Classification by Financial Institutions:
i.

Profit-Oriented Projects
a. New Projects
b. Expansion Projects
c. Modernization Projects
d. Diversification Projects
ii. Service-Oriented Projects
a. Welfare Projects
b. Service Projects
c. Research and Development Projects
d. Educational Projects

Project Life Cycle Stages

Three Main Stages of PLC:
The Pre-investment Phase
The Construction Phase
The Normalization Phase

Project Appraisal
Assessing the viability or feasibility of a
proposed project by the lending institution
is called Project Appraisal.
Project Appraisal is ex-ante analysis.
Project Evaluation is ex-post analysis.
Different Methods are used to evaluate a
project proposal. They are:

Payback Period
Return on Investment
Discounted Cash Flow
Internal Rate of Return
Net Present Value
Profitability Index

Financial aspects of project

appraisal
Payback period = Original investment/annual
net cash flows
Average Return on Investment
=[Average net income over life cycle
/Average net investment over life cycle]
Discounted cash flow techniques
NPV =[At / (1+r)t] Initial Investment where
t is the time period denoting years from 1 to
n.
IRR is the discount rate, r , which makes the
NPV = 0, in the following expression
NPV = [At / (1+r)t] I = 0

Network Analysis
Focuses on implementation
Network techniques are useful for
planning, scheduling and control of the
activities of a project
Taking into account interrelationship
among activities and resources constraint
There are two techniques
PERT-Program Evaluation Research technique
CPM-Critical path method

Network Analysis

(continued)

Activity
- It is a definite task, job or function to be
performed on a project
- Activity consumes resources
- Eg: Order material is an activity

Event
Is a specific point in time indicating
beginning or end of one or more activities
It marks milestones
Does not consume resources

Network Techniques
PERT

CPM

Its origin in military

Its origin is in industry

It is an event-oriented approach

It is an activity-oriented
approach

It allows uncertainty

It does not allow uncertainty

It is time based

It is cost based

It is probabilistic model

It is deterministic model

It does not demarcate between

critical and non-critical activities

It marks critical activities

It averages time

It does not average time

It is suitable when high precision It is suitable when reasonable

is required in time estimates.
precision is required.
E.g. Defense projects

E.g.- Construction projects

It estimates 3 different times of

completion

It estimates only one completion

time