Financial Appraisal definition, need, and techniques generally used.

1. FINANCIAL
APPRAISAL
BY : V I N AYA K N A N D A
S I D : 1 6 1 0 7 0 6 4

2. WHAT IS IT?
• Financial appraisal is an objective evaluation of the profitability and
financial strength of a business unit.
• Capital budgeting:
– Long term investments involve risks
– Huge investments and irreversible ones
– Long run in the business
• Many a times, the
terms financial performance appraisal and financial statement analysis are
used as synonymous.

3. WHY IS IT NEEDED?
• War of Wants v/s Resources
• Judicial decision of how much, where and when
• Achieving highest overall economic growth at minimum growth

4. MEASURING CRITERIA
I. Non discounting cash flow methods
i. Payback period
ii. Rate of return
II. Discounting cash flow methods
i. Annual equivalent method
ii. Net present value
iii. Internal rate of return
iv. Benefit to cost ratio

5. PAYBACK PERIOD
• Time in years, required to gather an amount equal to initial investment
• 𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅 =
𝑪𝒂𝒔𝒉 𝒐𝒖𝒕𝒍𝒂𝒚 𝒊𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
𝑨𝒏𝒏𝒖𝒂𝒍 𝒄𝒂𝒔𝒉 𝒇𝒍𝒐𝒘
• Simple, but ignore the time value of money
• Doesn’t consider depreciation

6. RATE OF RETURN
• Represents profit gained over a period as percentage of capital employed
• ARR =
Average income
Average Investment
• Another popular method in private industries

7. CASH FLOW

8. ANNUAL EQUIVALENT METHOD
• Investment annual cost
• Operational cost
• Ratio of benefits and costs

9. PRESENT VALUE
• PV = ⨊(P/ (1+i)^t )
• where
– P = Net Period Cash Flow
– i = Discount Rate (or rate of return)
– t = Number of time periods

10. NET PRESENT VALUE
• Present value of the future net cash flows from an investment project.
• NPV = ⨊(P/ (1+i)^t ) – C, where P = Net Period Cash Flow, i = Discount Rate (or rate
of return), t = Number of time periods and C = Initial Investment.

11. INTERNAL RATE OF RETURN
• The internal rate of return is a discount rate that makes the net present value (NPV)
of all cash flows from a particular project equal to zero.
• It is important for a business to look at the IRR as the plan for future growth and
expansion. The formula and calculation used to determine this figure follows.
0 = 𝑁𝑃𝑉 = ∑
𝐶𝑡
1+𝐼𝑅𝑅 𝑖 − 𝐶0
where:
Ct=Net cash inflow during the period t
C0=Total initial investment costs
IRR=The internal rate of return
t=The number of time periods

12. COST BENEFIT ANALYSIS
• Basics involve traffic projection, estimation of costs, benefits and
conducting appraisal using ‘With' and ‘Without' approach.
• Cost streams
– Capital cost- civil works, rolling stock, signalling, interest (current lending rate), of
bus way, buses
– Operating costs-metro, bus way, existing buses/private vehicle that will continue
even after MRT.
• Benefit items
– Capital and operating cost of traffic if MRTS is not taken up. This become benefit
(as this is not incurred after MRTS)
– Saving due to decongestion
– Saving in travel time
– Saving in petrol/ diesel consumption

13. Q/A