project appraisal.pptx

Students are recommended to obtain a copy of the following reference
books below:
1. Chandra P (2006), Projects; Planning, Analysis, Selection,
Financing, Implementation, and Review, Sixth Edition,
Tata McGraw-Hill Publishers, New Delhi.
2. Ngailo L (2012), Project Planning and Management, A
Logical Framework Approach, Second Revised Edition,
RenNic’s Publishers, Moshi.
3. Klastorin Ted (2004), Project Management, Tools and
Trade-Offs, John Wiley & Sons Inc, Washington.
4. J.M Ruzibuka and P.R. Rutebinga (1996) Project
Planning and management, A text of principles and
practice with a case.
5. More in CDTI Libraly and Online Books and journals.
By Module Master Essau Mkumbo

VIABILITY OF COMMUNITY DEVELOPMENT PROJECTS FOR IMPLEMENTATION

A project
A project is a planned investment
activity in which financial resources
are spent to create capital assets that
produce benefits over an extended
period of time.
 Projects should intend to accomplish
specific objectives in a specific time
period.
Therefore projects should have
specific starting time and specific
ending point.

Any development program need
to be broken down into groups of
related smaller manageable units
which are known as projects.
Therefore Projects contributes
towards the achievement of
various policies as guided by
specific programmes

 A program
 Is a set or series of coordinated, related, multiple
projects that continue over extended to achieve a
goal. It is a higher- level group of projects targeted at
a common goal.
 A program is a large conglomerate of activities which
are designed to offer a contribution towards the
achievement of a given policy.

Diagrammatic Representation of the Relationship
RELATIONSHIP BETWEEN PROJECTS, PROGRAMMES AND
POLICIES
Activities
Projects
Government Programs, Sectoral Programs and None
State Actors’ Programs
Government Policies, Sectoral Policies and None State
Actors’ Policies

Differences/similarities between a
project and a programme.
 Projects and programs are similar in the sense
that both are directed towards achieving a
certain goal (s) and require plans and
resources to reach their goals
 Both use similar tools, methods and Policies.
 Their differences lie primarily on scope and
time horizon.
NOTE Programs are sets of projects that are
grouped together to reach a longer range or
ongoing goals.

The process of project planing and
management should bear some
elements of participation so as to
consider the needs and
contribution of all key
stakeholders in
• Identification
• Preparation
• Appraisal
• Selection
• Implementation
• Monitoring and evaluation

Stakeholders participation
through project life cycle
Iden
tifica
tion
Prep
arati
on
App
rais
al
Sele
ctio
n
Imp
lem
enta
tion
Eval
uati
on

This study focus more on PROJECT
APPRAISAL AND SELECTION.
Therefore after a general introduction of
the project related issue.
therefore it is the interest of this study to
orient you to Project appraisal and
selection as we have mentioned
through the project life cycle.

Project appraisal is a stage in
which all financial projections are
rechecked for adequacy and
clarity.
The project appraisal is
undertaken in order to establish
the quantitative worthiness of the
project

 Financial appraisal
Involves predicting the financial
flows both expenditures and
revenues associated with the
investment.
Companies/organisations make
such an appraisal when choosing
where to invest.

Economic Appraisal
This is often used for public
projects appraisal because some
of the relevant flows involved are
not financial
Some of the costs incurred such as
environmental impact of an
infrastructure investment may
also have no market value.

APPRAISAL cont….
Project Appraisal therefore is an
assessment of the viability of the
proposed long term investment
project.
The quantitative appraisal is done
on the basis of the projected
cashflows

 Project Appraisal provides an
opportunity to re-examine every
aspect of the project plan to
asses whether the proposed
project is appropriate and sound
before large sum of resources are
commited.

Key issues in appraising
projects
 Need, targets and objectives
The starting point for appraisal:
applicants should provide a detailed
description of the project,
identifying the local need it aims to
meet. Appraisal helps show if the
project is the right response, and
highlight what the project is
supposed to do and for whom.

 Context and connections
Appraisal should help show that a
project is consistent with the
objectives of the relevant funding
program and with the aims of the
local partnership. Are there links
between the project and other
local programs and projects –
does it add something, or
compete?

 Consultation
Local consultation may help
determine priorities and secure
community consent and ownership.
More targeted consultation, with
potential project users, may help
ensure that project plans are
viable. A key question in appraisal
will be whether there has been
appropriate consultation and how it
has shaped the project

 Options
Options analysis is concerned with
establishing whether there are
different ways of achieving
objectives. This is a particularly
complex part of project appraisal,
and one where guidance varies.
It is vital though to review
different ways of meeting local
need and key objectives.

 Inputs
 It’s important to ensure that all
the necessary people and
resources are in place to deliver
the project. May include
volunteer help or premises a few
to mention.

 Outputs and outcomes
 Detailed consideration must be
given in appraisal to what a project
does and achieves: its outputs and
more importantly its longer-term
outcomes. Benefits to
neighborhoods and their residents
are reflected in the improved
quality of life outcomes (jobs,
better housing, safety, health and
so on),

 Value for money
 This is one of the key criteria
against which projects are
appraised. A major concern for
government, it is also important
for local partnerships and it may
be necessary to take local
factors, which may affect costs,
into account.

 Implementation
 Appraisal will need to scrutinize
the practical plans for delivering
the project, asking whether
staffing will be adequate, the
timetable for the work is a
realistic one and if the
organization delivering the
project seems capable of doing
so.

 Risk and uncertainty
 You can’t avoid risk – but you need to
make sure you identify risk (is there a
risk and if so what is it?), estimate the
scale of risk (if there is a risk, is it a big
one?) and evaluate the risk (how much
does the risk matter to the project.)
There should also be contingency plans
in place to minimize the risk of project
failure or of a major gap between
what’s promised and what’s delivered.

 Sustainability
 In regeneration, sustainability has
often been talked about simply in
terms of whether a project can be
sustained once regeneration
funding stops but sustainability has
a wider meaning and, under this
heading, appraisal should include
an assessment of a project’s
environmental, social and economic
impact, its positive and negative
effects.

Appraisal usually covers at
least the following aspects of
the project
Technical aspect
This aspects needs to provede
answers on if the project can work
while considering other technical
factors that might affect the project
design
 Also takes into concern the
materials and human resources and
the probable output that can be
achieved over time

Financial
This seeks answers on the
following questions ie
Can the project be financed
Will there be sufficient fund to cover the
expenditure through out the life of the
project

Economic
 This seeks answers on the
following questions ie
Will the nation and society at large be
better off as the result of the project?
Will the project benefits be greater than
the projects costs over life of the
investment when account is taken of
time.

Social and Gender aspect
This seeks to address the effects of
the project on different groups at
individual, household and
community level.
Also this aspect needs to consider
the project impact on women and
men as well as the men and women
participation in the project.
The most important question here is
if the social benefits of the project
will be greater than the social costs
of the project.

Institutional
This answers the following
questions
Are supporting institutions in place?
Can they operate effectively within
existing legistrative and policy
environment
Has the project identified the
opportunities for institutional
strengthening and capacity building

 Environmental
This seeks to address any adverse
effect of the project to the
environment and find out if
remedial measures have been
included in the project design.

Cont…….
Political
This aspects tries to question if
the project is compatible to the
government policy, at both
central and regional levels?

Sustainability and risk
This aspects needs answers on the
followings
 will the project be exposed to any undue
risks?
Will the project benefits be sustainable
beyond the life of the project?

What can appraisal do?
 Appraisal is useful/important as it helps
project Managers to….
 Be consistent and objective in choosing
projects
 Make sure their program benefits all
sections of the community, including
those from ethnic groups who have
been left out in the past
 Provide documentation to meet
financial and audit requirements and to
explain decisions to local people.

 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.

 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.

 Appraisal lays the
foundations for delivery.
Appraisal helps ensure that projects will
be properly managed, by ensuring
appropriate financial and monitoring
systems are in place, that there are
contingency plans to deal with risks and
setting milestones against which progress
can be judged.

 Help in Getting the system right
This is concerned with the
appropriateness of what ever is planned
to be undertaken i.e the scope of the
project, resources required, needs of the
society etc. All information's about the
project should demonstrate to be
appropriate for project implementation.

selection
 Selection of the project is done
among the proposed projects
basing on various criteria’s after
the project being appraised.

Selection cont….
 Selection is a stage which gives a
chance for the most viable
project to be financed for
implementation after clear
assessment on its reliability on
financial requirements and the
ability to pay.

Selection Cont……
The selection of the project for
implementation is based on its
worthiness and ability to pay
while more concern is on the
implementing agency economic
and financial ability and
resources both human and
physical resources.

TECHNIQUES FOR
APPRAISAL
 A number of techniques can be
used in the appraisal process.
These include Traditional (non
discounted) and discounted
measures of project worthiness.

TRADITIONAL MEASURES OF
PROJECT WORTH (NON
DISCOUNTED)
1. Payback period method
 This method determines the
number of years it will take to
recoup the projects investment.
 It is the time it takes the cash
inflow (benefits) from a project to
equal the cash outflow (costs),
usually expressed in years.

Calculating Payback period
If the project generates equal
annual cash flows, the payback
period can simply be calculated
by dividing cash outlay by the
annual cash flow.
Payback= Initial investment
Annual cash flow

Pay back cont……
 Example,
 The Organization X decided to
undertake coffee production and
processing project in 10 years with
an initial investment cost of
120,000,0000/=Tsh , the projected
cash flow is 20,000,000/=Tsh
annually from year 1 to ten
respectively. Calculate the payback
period (the formula above may
be used)

Cont…..
 If the project generates irregular
CF, the calculation of the project
involves adding up the projects
cash inflows (revenues) one year at
a time until the sum equals the
amount of the project initial
investment.
 It is given by the formula
= yrs to full recvry +Unrecovrd cost at start of the year
 Cash flow during full recovery year

Example
Years 0 1 2 3 4 5
Cash
flow
-18600 4500 4500 6500 6500 6500
Cum
cash
flow
-18600 -14100 -9600 -3100 3400 9900

Payback cont
Payback = 3 + 3100 =3. 47 years.
6500

Cont………………..
Decision Criteria:
 The decision rule for payback
method depends on management’s
acceptable PBP (Payback period)
 If the PBP is less than or equal to
that predetermined maximum or
standard PBP set by management,
then the project is accepted,
otherwise the project is rejected
 As the ranking method, it gives the
highest ranking to the project with
the shortest PBP.

Advantages of the
Payback method
 It is simple to understand and easy to
calculate.
 It is less costly as compared to the most
sophisticated measures of the project
worth that require a lot of the analysts,
time and the use of computers.
 It encourages investment on the short
term investments. Hence, a shorter PBP
ensures guarantee against loss and future
uncertainties associated with the project
 It can be used as a breakeven measure or
crude measure of project liquidity.

Disadvantages of the
payback method
 It ignores the timing of cash flows
within the payback period but also it
fails to take account of cash inflows
earned after the payback period.
 It ignores the time value of money
 It is unable to distinguish between
projects with the same payback period.
 It encourages investment in short term
projects. Therefore, it ignores long term
projects with growth prospects

Disadvantages Cont…..
 The method uses an arbitrary
cutoff period or maximum PBP as
the measure of determining
whether the project is
acceptable.
 There is no rational basis for
setting a maximum payback
period but rather the decision is
generally subjective.

 The Accounting rate of return is
also called Return on capital
employed (ROCE) or return on
investment (ROI) method.
 The method is used to calculate the
return generated from the net
income of the proposed project
investment.
AAR= Average Annual profit X 100%
Initial Cost of investment
1.Accounting rate of return (ARR)

ARR(ROCE, ROI) cont….
 Example
 Suppose an investment is
expected to yield cash flows of
Tsh 500,000/= annually for the
next five years, given that the
initial cost of the investment is
1,000,000/=Tsh. Calculate the
ARR of the project.

Year 0 1 2 3 4 5
Investme
nt cost
(1,000,000)
Cash
flows
500,000 500000 500000 500000 500000
Total
cash
flow
2,500,000
Net
profit
1,500,00
Annual
profit
1500000/5=
300,000/=
ARR in Tsh

 Applying in the formula
ARR=Average Annual profit X 100
Initial cost of investment
ARR=300,000 X 100% = 30%
1,000,000

 Decision Criterion
 If ARR exceeds a target rate of
return ( objective benchmark) set
by the project management or
past performance, the project will
be undertaken, otherwise it is
rejected.

Disadvantages of ARR
 It does not take account of the
timing of the profits from an
investment.
 It is a relative measure rather than
an absolute measure and hence
takes no account of the size of the
investment
 It takes no account of the length of
the project
 It ignores the time value of money

 The method expresses each year
profit in terms of the initial
investment multiplied by 100%
 Consider the two projects A and
B with the same initial
investment cost estimated 100m
as displayed in the table below
3. Peak profit Method.

Peak profit method in
(000,000)Tsh
Year 0 1 2 3 4
Project
A
(100) 20 40 60 40
Project
B
(100) 50 50 50 50

In Percentage
Expressing in percentage
Year 0 1 2 3 4
Project
A
(100) 20% 40% 60% 40%
Project
B
(100) 50% 50% 50% 50%

Peak profit cont
From the above Peak profit method
for project A= 60% and B= 50%
hence project A can be selected
Prior to B basing on Peak profit
method.
 Disadvantages
 The Peak profit method does not
allow high early profits to be
invested
 Does not take into account the time
value of money

 The method is used in selecting
one project out of several options
for funding.
 In this method yearly profits are
summed up, and the sum divided
by the number of years
 Each mean is expressed in as
percentage of the initial
investment
4. Average profit method.

Decision criteria
The choice is in favor of the
project with the highest average
profit rate

Average profit Method
Example (cash flow in
000,000Tsh)
Year 0 1 2 3 4 5 Total
profi
t
Av
profi
t
Av
profit
in %
Project A (100) 20 40 60 40 20 180 36 36%
Project B (100) 50 50 50 20 20 190 38 38%

Average profit method Cont
 Advantage
 Easy to compare % returns on
different investments to help
make a decision

 Disadvantages
 It ignores time value of the
money invested.

 THE DISCOUNTED TECHNIQUES
FOR ASSESSING VIABILITY OF
PROJECTS

DISCOUNTED MEASURES
OF PROJECT WORTH
 Discounted measures of project
worthiness are those which can
take into account the time value
of money. Discounting is the
process of reducing future
benefits and costs streams to
their present worth by using the
discounting factor which is
normally the interest rate on
capital or the cost of capital.

Cont…..
Therefore before discussing the
discounted measures we should
first understand the Time value
of money.

Project appraisal and
time value of money.
 Money has a time value. This
implies that the value of money
is different at different points of
time.
 For example, funds not spent
today can be lent to earn
interest. Therefore the amount of
funds available tomorrow will
exceed the amount of funds lent
to day.

Why money has Time
value.
 Risk and uncertainties;
 Future is always uncertain and risk.
This might be due to uncertain
future prices and availability of
goods.
 Inflation
 Due to inflation, money may lose
its purchasing power over time.
 Consumption
 Individuals generally prefer current
consumption to future consumption

Why time value cont…..
 Investment opportunities
 An investor can profitably use a
dollar received today, to give him
a higher value to be received
tomorrow or after a certain
period of time. Therefore the
receipt of money is preferred
sooner rather than later.

Techniques for adjusting
time value of money
 Compounding techniques
This is a technique used to give
future value of money.
 FVn=PV (1+r)n
Where by
 FVn= Future value after n years
 PV= Present value (Initial cash
flow)
 r = Annual interest rate
 n = Number of years

Cont
Discounting techniques;
This is a technique used to find
present values (PV) of money.
Present value (PV) is the worth of
money today that is receivable or
payable at the future date.

Cont….
 Discounting
 This is the procedure whereby
future values of cost and benefits
are reduced to reflect the lower
values that the societies, firms
and individuals place on future
costs and benefits are compared
to those arising now.

Cont….
 Discount rate
 This is a rate similar to a
negative rate of interest at which
future streams of cost and
benefits are written down.
 Discounting project costs and
benefits streams produces a
discounted cash flow (DCF)

 It is given by
 PVn=FV/ (1+r)n
OR
 PVn= FV x ( 1)
(1+r)n
Where by
 PVn= Present value of cash flow in n
years
 FV= Future cash flow
 R= annual rate of interest
 n= number of years

Example of discounting
Years Benefits Df
(10%)
Present
value
0 1000 1.0 1000
1 600 0.909 545.4
2 500 0.826 413.0
3 500 0.751 375.5
4 500 0.683 341.5
5 500 0.620 310.00
Total 2985.9

The sum of discounted cash flow
gives a present value of 2985.9

DISCOUNTED MEASURES OF
PROJECT WORTH
 The Net Present Value( NPV)
 This is a major discounted cash
flow technique of measuring
project worth.
 It is defined as The present worth
of the income stream generated
by an investment

 Mathematically
NPV=
Where by
 NPV= Net Present Value,
 r =discount rate,
 n =number of years,
 NCF= Net cash flow
 Co= cost of investment

Example
Years 0 1 2 3 4 5 6
Cash
flow
(600000
)
75000 100000 150000 200000 210000 1500
DF
(4.75%)
1.0 0.9547 0.9114 0.8700 0.8306 0.7929 0.757
PV (600000
)
71599.0
4
91136.4
1
130505.
61
166116.
92
166513.
39
1135
75
NPV 139,416.12

Decision Criteria (at a
discount rate)
 Accept the project proposal with
positive NPV (NPV > 0).
 If the project has a negative NPV
(NPV<0) it tells us that the future
returns is lower than the value of
investment cost therefore it is
not worthwhile to undertake such
a project.

Decision criteria cont…
 If the project has the NPV=0,
means that the future benefits
are the same as the investment
cost i.e. the project is at
breakeven point. Therefore the
project will have no effect
whether it is accepted or
rejected.

Advantages of the NPV
 It can be relied upon invariably to give
the correct choice of the projects
 It gives the measure of the absolute
surplus derived from the investment
 Usually the higher the discount rate the
smaller the NPV, but in order to asses
whether a larger NPV indicates a more
efficient use of capital the NPV has to be
supplemented by the calculation of IRR.

Disadvantages
 The discount rate (i.e.
opportunity cost of capital) needs
to be obtained externally to the
methods of calculations
 The measure fails to indicate
which project uses capital more
efficiently

INTERNAL RATE OF
RETURN IRR
 Is the maximum interest that the
project could pay for the
resources used if the project is to
recover its investment cost and
still break even.
 It is the rate at which the
discounted benefits equal the
discounted costs and the NPV is
zero.

 Mathematically
 IRR= LDR + (HDR-LDR) {NPVLDR }
 {NPVLDR +NPVHDR }
 Where by
 IRR= Internal rate of return
 LDR = Lower discount rate
 HDR = Higher discount rate
 NPV= Net present value

Example
Given the NPV at lower discount
rate 19000 at 35% and NPV at
higher discount rate is -720,000
calculate the internal rate of
return.

IRR cont
 Since
 IRR= LDR + (HDR-LDR) {NPVLDR }
{NPVLDR +NPVHDR
}
 Where by
 LDR= 35
 NPVLDR =190000
 NPVHDR =720000
 IRR=35+ (40-35) {190000 }
{190000 +720000 }

Cont
 =35% +5%(190000 )
(910000)
=35%+ 5%(0.209)
=35% + 1.045%
=36.045%

Decision criteria
 Accept the project with IRR
greater than the discount rate.
 If the IRR is equal to the discount
rate, the project management
should try to analyze further the
usefulness of such a project in
terms of non quantifiable benefits
i.e. substantial contribution to
employment

Benefit cost ratio (BCR)
 This is a ratio which is worked
out by calculating the present
worth of the benefits followed by
the present worth of costs.
Its is given by
 BCR= Summation of Net present worth of benefits
Summation of Net present worth of costs

Example
Lets consider a case in which the
sum of the present worth of a
stream of income (benefits) for a
certain project is 29.64 million
Tsh while the present worth of
the project cost is 20.06 million
Tsh calculate the BCR
BCR=29.64 = 1.48
20.06

Decision criteria
 The project shall be accepted for
implementation if the BCR is
greater than one and rejected if
the BCR is less than one

Example 2
 Suppose you wish to invest the
capital amounted 10,000,000$ in
agricultural production project, the
projected cash flow for the project
in 8 years is 2,000,000$,
1,500,000$, 1,400,000$,
1,600,000$, 3,600,000$,
1,700,000$ respectively and
2,000,000$ in the following years.

 REQUIRED
 Using the projected cash flow
above calculate the internal rate
of return at 10% and 25%
discount rates then use IRR as a
base for advising the investor.

Example 3
Yea
r
0 1 2 3 4 5 6 7 8
TC 100
0
600 500 500 500 500 500 500 500
TR - 800 800 800 800 800 800 800 800

cont
 REQUIRED
 Using the projected cash flow
above calculate the internal rate
of return at 10% and 25%
discount rates then use IRR as a
base for advising the investor.

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