MDS-510, Lecture -6

1. LECTURE:06 Development Project Appraisal for sustainable development M. A. Kamal, Ph.D Director General National Academy for Planning and Development

3. 1. Introduction: 1.1 Development projects impose a series of costs and benefits on recipient communities or countries. 1.2 Those costs and benefits can be social, environmental, or economic in nature, but may often involve all three. 1.3 Irrigation projects may facilitate the growing of cash crops in one locality, but cause water shortages, and hence economic, social and environmental pressures in another locality.

5. 3. Projects types: Projects are: 3.1 Type ‘x’ : Self financing projects i.e. projects which earn revenue through sale of output (goods & services). These are called directly productive projects, i.e.. Industrial Projects. 3.2 Type “y” : In directly productive but non-revenue earning projects, i.e., projects which give rise to tangible output, benefit of which do not accrue directly to projects themselves but to other parties Example: Irrigation Projects, Roads, Bridge etc. 3.3 Type “z ” : Service Sector Projects Projects which do not give rise to tangible output but provide service benefits to the society. Example: School, College, Hospital, Training Institute.

7. 4.4 Project Cycle Identification Evaluation Preparation Implementation & Monitoring Appraisal Approval

8. 5. Project Appraisal 5.1 Project Appraisal involves the comparison of costs and benefits. If benefits exceeds costs, the project could be considered for acceptance Otherwise, it is not. 5.2 The basic principle in appraisal / CBA is for potential acceptance of a project. 5.3 Project Appraisal means a pre-investment analysis of a project to determine whether the project should be implemented or not.

9. 6. Objectives of Project Appraisal 6.1 Project Appraisal is necessitated because the resources or means are limited as compared to the needs of the society. 6.2 As a result, any investment undertaken implies depriving other projects resources. 6.3 Hence, it is very important to appraise each project before investment decision so that scarce resources are utilized in the best possible ways. 6.4 In other words, 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 (in terms of socio-economic benefits). 6.5 For this and for ensuring economic use of resources, we have to appraise each project very minutely from different angles.

10. 6. Objectives of Project Appraisal 6.6 A Project Appraisal involves detailed pre-investment analysis of market & technical feasibility, financial soundness, economic desirability and, finally, measuring its investment worth. 6.7 The task aims mainly at ensuring that scarce resources are put to most effective use. 6.8 It requires the combined efforts of a team of persons from various disciplines such as engineers, financial analysts , economists, etc . working in close co-ordination .

11. 7. Scope of Project Appraisal 7.1 Market Feasibility study. 7.2 Technical Feasibility / viability. 7.3 Financial Soundness. 7.4 Management and Organizational Aspects / Managerial Soundness. 7.5 Economic viability / Appraisal. 7.6 Environmental Appraisal / Viability.

18. 8. Methods of Calculating Profit Worthiness. 8.1 Net Present Value = NPV 8.2 Benefit Cost Ratio = B/C Ratio 8.3 Internal Rate of Return = IRR

19. 8.1 Formula for: i) NPV = Discounted Total Benefits – Discounted Total costs. 2.2 Formula: ii) B/C Ratio = Discounted Total Benefits Discounted Total costs

21. 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% 9. Exercise: 312.32 317.12 365.44 337.04 81.92 30.72 .512 105.28 39.48 .658 160 60 3 102.4 38.40 .640 120.96 45.36 .756 160 60 2 128.00 48.00 .800 139.2 52.2 .870 160 60 1 - 200 1.00 - 200 1.00 - 200 0 Discounted Benefit Discounted Cost D.F at 25% Discounted Benefit Discounted Cost Discount Factor at 15% Benefit Cost Year

23. 11. The basic difference between Financial Appraisal &Economic Appraisal

24. 12. Types of Project Appraisal 12.1 Financial / Commercial Appraisal 12.2 Economic Appraisal 12.3 Technical Appraisal 12.4 Social Appraisal.

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