PMEE UNIT 6

NOTES
Prof. G. N. Desai

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PROJECT APPRAISAL
 Systematic and comprehensive review of the economic,
environmental, financial, social, technical and other such aspects of
a project to determine if it will meet its objectives.
 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.

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TYPES OF APPRAISALS
 1. Political : will the project be compatible with government policy, at both
central and regional levels?
 Environmental : will the project have any adverse effects on the environment?
Have remedial measures been included in the project design?
 Technical: will the project work? Has due attention been paid to technical
factors affecting the project design? Given the human and material resources
identified, can the project activities be undertaken and outputs achieved within
the time available and to the required standards?
 Financial: can the project be financed? Will there be sufficient funds to cover
the expenditure requirements during the life of the project?

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 CONTINUED…
 Economic: will the nation and society at large be better off as a result of the project?
Will the project benefits be greater than the project costs over the life of the
investment when account is taken of time (namely, is the Net Present Value of the
project positive at the test discount rate)?
 Social and gender: what will be the effect of the project on different groups, at
individual, household and community levels? How will the project impact on women
and men? How will they participate in various stages of the project cycle? Will the
social benefits of the project be greater than the social costs over the life of the
investment when account is taken of time?
 Institutional: are the supporting institutions in place? Can they operate effectively
within the existing legislative and policy environment? Has the project identified
opportunities for institutional strengthening and capacity building?

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 CRITERIA FOR PROJECT

SELECTION
1.Benefit/cost ratio or cost/benefit ratio
This, as its name suggests, is the ratio between the Present Inflow Value to Present
Outflow Value. The former is the cost invested in any project and the latter is the
project’s value return. Preferred projects are those which have more Benefit Cost
Ratio or lower Cost Benefit Ratio.

 2. Payback period
This is the ratio of total cash to average cash per period. In other words, it is the time
required to recover the project’s investment.

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 3. Net Present Value or NPV
This is the difference between cash inflow’s present value and cash
outflow’s present value. This NPV must be positive at all times. If
there are multiple projects, choose one with higher NPV.
 4. Internal rate of return
This is the rate of interest where NPV is zero. The state gets attained
when present outflow value equals present inflow value.

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BREAK EVEN ANALYSIS
 The break-even point (BEP) or break-even level represents the sales amount
—in either unit (quantity) or revenue (sales) terms—that is required to cover
total costs, consisting of both fixed and variable costs to the company. Total
profit at the break-even point is zero.

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 B. E. P. APPLICATIONS
 Break even analysis not only highlights the areas of economic strength and weakness
in the firm but also helps in finding out the ways which can enhance its profitability.
With the help of this analysis management of production firm can take decisions
related to the following:
 (i) Safety margin. It decides the extent to which the firm can afford to decline in sales,
before it starts incurring losses.
 (ii) Volume needed to attain target profit.
 (iii) Change in price, and its affect.
 (iv) Whether to expand production capacity or not.
 (v) Whether to add a new product or drop production of any product.
 (vi) Whether to make or buy.
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 (vii) Selection of production machinery so as to get maximum
profit for a particular volume of the product out of the available
machineries.
 (viii) Improving profit performance by:
 a. Increasing the volume of sales, and or
 b. Increasing the selling prices, and or
 c. Reducing the variable expenses per unit, and or
 d. Reducing the fixed costs.

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 LIMITATIONS OF B. E. P.
 1. Since Break Even Analysis is based on accounting data therefore, it can be sound
and useful only if the firm in question maintains a good accounting system.
 2. It is based on the assumptions of given relationships between costs and revenues,
on one hand, and input on the other.
 3. Cost data’s of the part period may not hold good for the current period.
 4. Selling costs may not remain constant.
 5. The cost revenue- Volume relationship is linear. But this is realistic only over
narrow ranges of output.
 6. Break even analysis is not an effective tool for long range use and its use should be
restricted to the short run only.
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 PROJECT FEASIBILITY

REPORT
a feasibility study is used to determine the viability of an idea, such as ensuring a
project is legally and technically feasible as well as economically justifiable. It tells us
whether a project is worth the investment—in some cases, a project may not be
doable. There can be many reasons for this, including requiring too many resources,
which not only prevents those resources from performing other tasks but also may cost
more than an organization would earn back by taking on a project that isn’t profitable.
 A well-designed study should offer a historical background of the business or project,
such as a description of the product or service, accounting statements, details of
operations and management, marketing research and policies, financial data, legal
requirements, and tax obligations. Generally, such studies precede technical
development and project implementation.

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 A feasibility study evaluates the project’s potential for success; therefore,
perceived objectivity is an important factor in the credibility of the study for
potential investors and lending institutions. There are five types of feasibility
study—separate areas that a feasibility study examines, described below.
 1. Technical Feasibility 
 2. Economic Feasibility
 3. Legal Feasibility
 4. Operational Feasibility
 5. Scheduling Feasibility

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 DETAILED PROJECT REPORT

(DPR)
Preparation of detailed project report is further step in firming up the proposal. When an
investment proposal has been approved on the basis functional report and the proposal is a
major proposal, it would be necessary to detailed project report to firm up the proposal for
the capital cost as well as the various facilities. It includes...
 Examination of technological parameters.
 Description of the technology to be used.
 Broad technical specification.
 Evaluation of the existing resources.
 Schedule plan.
 General layout.
 Volume of work.
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 Hence these reports are to be made before investment is made into project. Thus formulation of investment is
based on the studies is made. These can be considered as pre-investment decision. Detailed project report is
prepared only for the investment decision-making approval, but also execution of the project and also
preparation of the plan. Detailed project report additionally includes that is contents in addition to Feasibility
study reports are.
 Project description.

 Planning and implementation of the project.

 Specifications.

 Layouts and flow diagrams.

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