Lecture4 Project Planning 1 Presented by M A
Lecture-4 Project Planning - 1 Presented by M. A. Kamal, Ph. D Director General National Academy for Planning & Development 1
Outlines: 1. 2. 3. 4. 5. 6. 7. 8. 9. Introduction Objectives of Project Appraisal Scope of Project Appraisal Methods of Calculating Profit Worthiness Formula for Acceptability Criteria The basic Difference between Financial Appraisal & Economic Appraisal Types of Project Appraisal Conclusion. 2
1. Introduction: 1. 1 Project Appraisal: Pre-Investment Analysis/Ex-ante Analysis. 1. 2 Project Evaluation: Post-Implementation Analysis/ Ex-post Analysis. 3
Project Appraisal 1. 3 Project Appraisal involves comparison of costs and benefits. If benefits exceeds costs, the project could be considered for acceptance. 1. 4 The basic principle in appraisal / CBA is for potential acceptance of a project. 1. 5 Project Appraisal means a preinvestment analysis of a project to determine whether the project should be implemented or not. 4
2. Objectives of Project Appraisal 2. 1 Project Appraisal is necessitated because resources or means are Limited as compared to the needs of the society. As a result, any investment undertaken implies depriving other projects resources. Each project is appraised before investment decision so that scarce resources are utilized in the best possible ways. Before allocation of resources for a particular project, the decision making authority must convince itself that the proposed project is the best and most economical way of achieving the desired objective (socio-economic benefits). For ensuring economic use of resources we have to appraise each project very minutely from different angles. (Cont. ) 2. 2 2. 3 2. 4 2. 5 5
2. 6 Project Appraisal involves detailed preinvestment analysis of market & technical feasibility, financial soundness, economic desirability and, finally, measuring its investment worth. 2. 7 The task aims mainly at ensuring that scarce resources are put to most effective use. 2. 8 It requires the combined efforts of a team of persons from various disciplines (engineers, financial analysts, economists etc. ) working in close, co-ordination. 6
3. Scope of Project Appraisal 3. 1 3. 2 3. 3 3. 4 Market Feasibility study. Technical Feasibility / viability. Financial Soundness. Management and Organizational Aspects / Managerial Soundness. 3. 5 Economic viability / Appraisal. 3. 6 Environmental Appraisal / Viability. 7
3. 1 Market Feasibility a) Whether sufficient demand does exist? b) In case of import substitution whether domestic cost of production is less than cost of import. 8
3. 2 Technical Appraisal a. Availability of inputs at reasonable cost. b. Consistency & soundness of engineering design. c. Economics of scale in production. d. Appropriate technology & alternative ways of production. e. Advantageous Location of the project. f. Maintenance & Repairs. g. Provision for expansion. h. Balancing of equipment 9
3. 3 a. b. c. d. e. f. g. h. Financial Soundness Exhaustive & realistic cost estimation Sound capital structure: Fund Source Provision for working capital requirement Generation of sufficient cash flow to cover debt-service Liability. Generation of adequate profit. Safety margin. Break- Even Point Pay back period. v Pay back period: Pay back period is a measure of Project’s Capital recovery. It is defined as the Length of time it takes to recover the initial investment of a Project. 10
3. 4 Managerial Soundness a. Experience of the top managerial personnel in the line. b. Expertise and ability of supervisory staff members. c. Balance between supervisory staff and work forces. d. Clarity of job description, responsibility and accountability. 11
3. 5 Environmental Aspects The environmental impacts include – a. Ecological : Fisheries, Tree Plantation, Wet Land / Wet Land Habitat, Forest. b. Physico- Chemical : Flood Control & Drainage Erosion, Drainage, Congestion / Water Logging, Obstruction to waste water Flow, Soil Fertility, Early Flooding. c. Human Interest : Areas of Settlements, Agricultural Lands, Navigation / Boat Communication, irrigation Facilities, Landscape, Land values. 12
3. 6 Measurement of Investment Worthiness a. What benefit does the project promise for its sponsors or owners? b. What benefit does the project promise for the national economy? The satisfactory answers to these questions provide the prime test of a project’s acceptability. 13
4. Methods of Calculating Profit Worthiness. 4. 1 Net Present Value = NPV 4. 2 Benefit Cost Ratio = B/C Ratio 4. 3 Internal Rate of Return = IRR 14
5. Formula for: 5. 1 NPV = Discounted Total Benefits – Discounted Total costs. 5. 2 B/C Ratio = Discounted Total Benefits Discounted Total costs 15
5. 3 Formula for IRR: NPV 3. IRR = LRD + LRD x ( HRD – LRD ) NPV - NPV LRD HRD LRD = HRD = NPV = LRD NPV = HRD Lower Rate of Discount at which NPV is positive; Higher Rate of Discount at which NPV is negative; Net Present value at the Lower Rate of Discount; Where, Net Present value at the Higher Rate of Discount. What is IRR? IRR = Internal Rate of Return is that rate of discount that makes/ reduces the Net Present Value (NPV) of a project is to Zero. 16
Year Cost Benefit Discount Factor at 15% Discounted Cost Discounted Benefit D. F at 25% Discounted Cost Discounted Benefit 0 200 - 1. 00 200 - 1 60 160 . 870 52. 2 139. 2 . 800 48. 00 128. 00 2 60 160 . 756 45. 36 120. 96 . 640 38. 40 102. 4 3 60 160 . 658 39. 48 105. 28 . 512 30. 72 81. 92 337. 04 365. 44 317. 12 312. 32 NPV = DTB – DTC NPV at 15% = 365. 44 – 337. 04 = 28. 40 B/C at 15% = 365. 44 337. 04 = 1. 08 NPV at 25% = 312. 32 – 317. 12 = - 4. 8 IRR = 15 + 28. 4 × (25 -15) 28. 4 – (- 4. 8) = 15 + 28. 4 × 10 28. 4 + 4. 8 = 15 + 28. 4× 10 33. 2 = 15 + 8. 55 = 23. 55 IRR = 23. 55% 17
6. Acceptability Criteria 6. 1 NPV (Net Present Value) if if if 6. 2 BCR (Benefit Cost Ratio) if if if 6. 3 IRR (Internal Rate of Return) if if if v NPV > 0 NPV < 0 NPV = 0 ACCEPT REJECT AMBIGUOUS BCR > I BCR < I BCR = I ACCEPT REJECT AMBIGUOUS IRR > r IRR < r IRR = r ACCEPT REJECT AMBIGUOUS r = MARKET RATE OF INTEREST 18
7. The basic difference between Financial Appraisal &Economic Appraisal 19
8. Types of Project Appraisal 8. 1 8. 2 8. 3 8. 4 Financial / commercial Appraisal Economic Appraisal Technical Appraisal Social Appraisal. 20
9. Conclusion: 9. 1 9. 2 9. 3 9. 4 9. 5 9. 6 Project appraisal is the basic criterion of selecting a project. Objectives of project appraisal are to measure the different worthiness of a project Scope is wide and essential Environment impact is crucial in project implementation. Measurement of investment worthiness are principal decision making tools. Positive signal is the key to successful selection of a project. 21
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