Term Paper on Project Appraisal | Organization | Project Management

Here is a term paper on ‘Project Appraisal’ for class 9, 10, 11 and 12. Find paragraphs, long and short term papers on ‘Project Appraisal’ especially written for school and college students.

Term Paper on Project Appraisal  

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1. Term Paper on the Meaning of Project Appraisal:

Project appraisal is a tool with lending financial institution and banks to make an independent and objective assessment of various aspects of an investment proposal. It determines viability of a project. Viability of a project is assessed in terms of inter-relationship of its economic, technical, financial, social and managerial aspects, e.g. demand from market determines plant capacity and production process, which in turn would determine means of financing.

Project appraisal aims at identifying strengths and weaknesses in the projects. The main objective is to minimize the risk of lending by improving quality of the project.

In other words, it is the process of assessing and questioning proposals before resources are committed. Project appraisal is a requirement of regeneration of the funding programme.

One basic question remains here what can project appraisal deliver? Project appraisal delivers benefits in terms of assisting in decision-making to the partners of the project as well as guides banks and financial institution for extending loans to these projects.

Project appraisal helps a partnership:

i. To be consistent in choosing projects.

ii. To make sure that its programme benefits all sections of the community.

iii. To provide documentation to meet financial and audit requirements.

Appraisal Justifies Spending Money on a Project:

Appraisal asks fundamental questions about whether funding is required and whether a project offers good value for money. It can give confidence that public money is being put to good use, and help identify other funding to support a project.

Appraisal is an Important Decision-Making Tool:

Appraisal involves the comprehensive analysis of a wide range of data, judgments and assumptions, all of which need adequate evidence.

It ensures that projects will be properly managed, by ensuring that appropriate financial and monitoring systems are in place, that there are contingency plans to deal with risk situations.

2. Term Paper on the Process of Project Appraisal:

It follows a specific pattern because it requires multidimensional analysis of various interrelated aspects:

1. Analyzing Economic Aspect:

Here appraisal determines economic value of cost and benefit. Economic analysis is required to assess whether the project benefits are greater than project costs to justify investment. Various economic benefits may increase output of goods or services leading to increase in wages or employment, larger government revenues, high return on investment to owner’s capital.

The economic impact of project implementation is analyzed with specific indicators, which can be static or dynamic. Static indicators use non-discounting methods where time is not involved in the analysis while with dynamic indicators length of time is considered. Four major dynamic indicators are used for both financial and economic evaluations of the projects.

i. Net Present Value (NPV):

It is the present value (PV), of net benefits of the project. It is obtained by discounting the stream of the net benefits produced by the project over its lifetime back to its value in the chosen base period, usually the present.

ii. Internal Rate of Return (IRR):

A discount rate that equates the present value of future cash flows with the initial investment.

In other words, IRR is the discount rate if used to discount the projects net present value equals to zero.

As per the general practice in investment projects, if IRR is greater than some target rate of return or cost of capital then accept the project, if IRR is less than the appropriate cost capital, it should not be accepted.

iii. Payback Period:

It is the length of time to recover initial cash out flows on the projects. According to the payback method, the shorter the payback period, the more desirable the project.

iv. Benefit Cost Ratio (BCR):

It is simply the ratio of the sum of the projects discounted benefits to the sum of its discounted investment and operating costs. A project should be accepted if its BCR is greater than or equal to one.

2. Analyzing Technical Aspect:

Technical appraisal of the project involves a critical study of the following:

i. Location:

There are a number of factors that influence industrial location.

a. Raw Material Supplies:

There are some industries located near to the source of raw materials particularly industries with high material index. For example, iron and steel mills, sugar mills, timber industry.

Industries using perishable materials also tend to be located close to the raw material sources.

b. Proximity of Markets:

Certain types of industries tend to be located near the market mostly final output is bulky or fragile or perishable like milk, meat, etc.

ii. Transportation Facilities:

Transportation cost plays a major role while deciding mode of transportation. The companies do generally not prefer places with high transportation cost.

iii. Infrastructure Facilities:

It includes power, fuel supply, electricity, water supply, and roads, etc. Technical feasibility study should consider the adequacy and suitability of the plant layout, the equipment and their specification apart from above-mentioned factors.

3. Analyzing Financial Aspect:

Purpose of financial analysis is to ascertain the revenue producing nature of the project. It should ensure that satisfactory accounts are maintained for effective control of expenditure. Also, since banks finance only a part of investment cost of a project, it is necessary to ensure that funds from other sources are available on acceptable terms.

Projects are appraised in following financial aspects:

i. Cost Analysis:

A proper cost analysis should be worked out to decide cost of production.

ii. Pricing:

Price must be fixed very judiciously because price is the cause of demand.

iii. Financing:

It is concerned with raising the funds and making their efficient use.

iv. Income and Expenditure:

This analysis helps in ascertaining the cost involved and profit expected from the project.

Financial analysis helps in identifying financial soundness of the project in terms of efficient operations, cost of production, return on investment, profitability, pricing, budgeting and effective control.

4. Commercial or Market Aspect Analysis:

An intensive scanning and analysis of the proposed environment in which industrial unit has to function should form the basis for analyzing market opportunities are expressed in terms of demand forecasts, market share, etc.

5. Political and Labour Aspect Analysis:

Financial institution pays attention to political environment and labour conditions of the area where the project is to be located.

The lending institution appraises the project to examine its viability on technical, economic, commercial and financing grounds. If the appraised report is found satisfactory, the loan application will be considered favourably.

3. Term Paper on the Project Report:

Once the project is identified project report is formulated after examining various relevant aspects.

An expert prepares a project report after detailed study and analysis of the various aspects of a project. It provides a comprehensive analysis of the inputs and outputs of the project.

Importance of the Project Report:

Project report is very important requirement for implementing the project. It communicates the practicality of a project in terms of different factors like economy, finance, technology, and social responsibility. It is needed by the entrepreneur for carrying out expansion or starting production. Financial corporations and banks for granting loans need it, to check how production should be organized to yield maximum returns.

Contents of a Project Report:

Project report has following contents:

i. Objective and scope of the report.

ii. Product characteristics (specifications, product uses and application, standards and quality).

iii. Installed capacity, anticipated demand, and price structure.

iv. Price, sources and properties of raw materials.

v. Process of manufacturing, production schedule, production technique.

vi. Plant and machinery (essential infrastructure).

vii. Land and building (land area, construction schedule).

ix. Financial implications (working capital requirement, cost profitability).

x. Marketing strategies and trading practices.

xi. Requirement of staff, labour, expenses on wage payment.

An entrepreneur can himself prepare the report or take assistance from experts like small industries development organization and some-times even state government helps in matters of financial assistance.

4. Term Paper on the Role of Development Banks in Project Appraisal:

Development banks are supposed to play a significant role in the establishment of industrial projects, besides the conventional role of supplying term capital. The management of development bank carries out two tasks simultaneously. As a financial agency, development bank provides term loans. Secondly, it is concerned with profitability and safety aspects of the investment.

The task of project appraisal in a development bank is often very difficult. It evaluates a project from various angles like technical, economic, financial and market/commercial. If a project is found suitable from all the four angles, assistance is granted by development bank.

After assistance has been granted for a project, the development bank must keep a close watch on its progress with a view to ensure that assistance is utilized for the purpose for which it was sanctioned, and to assess whether the project will be completed within the original estimates of capital cost and to evaluate production performance and working results against the original expectations.

The bank may exercise an effective control over the affairs of the assisted company by nominating its own representatives in the board of the directors of the company.

Process of Project Evaluation by Development Bank:

In considering loan application for financing a project, development banks in India take into account the following factors:

1. Technical Appraisal:

The technical appraisal involves a critical examination of:

i. Suitability of the technical process.

ii. Locational aspect, i.e., nearness to the sources of raw material, availability of utilities—water, power, transport facilities, availability of skilled and unskilled labour and market for the product.

iii. Plant layout equipment and production flow.

iv. Utilization of by products and disposal of factory wastes.

v. Construction and installation schedule.

2. Financial Appraisal:

Projects showing earnings sufficient to cover fixed cost, operational and maintenance costs giving an adequate return on total investment are considered to be financial sound.

Following financial aspects are analyzed:

a. Cost Estimates:

i. Cost of land, conveyance, building.

ii. Plant and machinery cost and other taxes.

iii. Miscellaneous fixed assets—furniture, office equipments, tools.

iv. Startup costs, including the cost of raw materials, direct wages, salaries, etc.

b. Financing Pattern:

i. Share capital.

ii. Long-term loans from financial institutions.

iii. Public deposits.

Besides examining financing pattern with the help of debt equity ratio, banks look at other important ratios also to evaluate the financial and operational cost of the project.

These ratios are:

i. Current ratio.

ii. Return on equity.

iii. Net profit ratio.

iv. Gross profit ratio.

Banks evaluate projected profitability and cash flow in terms of the three important indicators like:

i. Debt service coverage ratio.

ii. Interest services coverage ratio.

iii. Internal rate of return.

In the evaluation of project, different viewpoints are analyzed. In the management view, the crucial ratio is return on investment, from the shareholder’s view the earning per share, from the lender’s view debt service coverage ratio is considered as important.

3. Economic Appraisal:

i. Contribution of the project to the economy.

ii. Employment potential.

iii. Prospects of exports.

iv. A study of pricing policy in relation to demand.

Finally in order to ensure satisfactory progress of the project and proper utilization of money sanctioned, the development bank should see that experienced technical and managerial personnel are engaged by assisted units.

4. Capital Expenditure Decisions:

Long life and smooth functioning of an organization of any nature demand consumption of certain resources like machinery, raw material, etc. These resources are called assets in organization.

Amount spent by an organization for acquiring these resources can be classified into:

i. Revenue expenditure.

ii. Capital expenditure.

i. Revenue Expenditure:

Revenue expenditure is defined as expenditure incurred on day-to-day running of business like rent of the factory, salaries of employees, consumable supplies, raw material, etc.

ii. Capital Expenditure:

Capital expenditure is defined as expenditure creating future benefits.

Capital expenditures are incurred to acquire or upgrade a physical asset such as land, building, tractor, machinery and equipment by an organization.

Capital Expenditure Means:

i. Acquiring assets like tractor, machinery, etc.

ii. Making them ready for use.

iii. Legal cost of buying the assets.

iv. Transportation cost.

v. Any cost incurred in making the asset like tractor, machinery ready for use.

Capital expenditure is the most important decision to be made by management of an organization because:

i. It involves a huge sum of money to be invested.

ii. Reversal of decision means bringing loss as the organization has to sell the purchased asset at a lesser price than its original cost.

iii. Company’s growth and development depends upon these capital expenditure decisions as they affect the productivity of the organization.

For example- Buying a tractor is a capital expenditure decision for agriculture firm and it is important because it involves huge sum of money and company’s growth and development depend upon the decision of buying a tractor because tractor will affect the productivity of the firm.

Capital expenditure decision involves the decision of allocation of funds (money) to long-term assets like plant, machinery, building, etc., that would yield benefits in future. That is why these capital expenditure decisions are also called investment decisions of any firm.

For example- Plant, building and machinery are there in an organization and will continue to give their services to the organization till their life, i.e., yielding benefits in future.

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