PROJECT APPRAISAL

AND EVALUATION

UNIT-1
Concept of Project
A project is a temporary endeavor an
enterprise designed to achieve a specific
objectives with the constraints of time,
cost and quality using resources (physical,
financial, human, natural and
informational).
It has fixed beginning and ending dates
and formed a life cycle consisting of
different phases.
 Project Appraisal and Evaluation

 Project appraisal is an overall assessment of the relevance,

feasibility and sustainability of a project prior to making a
decision on whether to undertake it.
 The main objective of project appraisal is to ultimately
decide whether the proposed/sponsored project in the FR has
to be accepted for Capital Investment, or be rejected.
 The initial appraisal of the project sponsored also aims at, if
need be, recommending the steps or ways in which the
project can be redesigned or reformulated with a view to
better technical, financial, commercial and economic
viabilities; also minimize any adverse on negative
environmental impact.
 Project Appraisal and Evaluation contii…
 Thus, project appraisal is an essential tool for judicious
investment decision-making, full and complete data and
information need to be documented/presented, and
analyzed the FR so as to facilitate the appraisal authorities
to carry out:
(i) Demand analysis to establish convincingly the need for
the project,
(ii) Check on optimal location,
(iii) Technical analysis to determine whether the
specification of technical parameters are sound and
realistic,
(iv) Financial analysis to assess whether the project proposal
is financially viable,
(v) Commercial analysis to establish the soundness of
product or service specifications, marketing plans,
Appraisal factor
Technical Assessment: Technical analysis
of the project is primarily concerned with:
-material inputs and utilities
-manufacturing process/technology
-Product mix
-Plant capacity
-Plant location
-Machineries and equipment
Economic Assessment: Economic
analysis is also known as social cost
benefit analysis concerned with judging a
project.
It measures the social cost and
benefit and measures the impact of project
on saving, investment, distribution of
income in the society.
Marketing Assessment: Marketing
analysis is primarily concerned with
marketing related issues.
It will analyze the aggregate
demand for the proposed products or
services in the future and the market share
of the project.
Financial Assessment: Financial analysis
seeks to confirm whether the proposed
project will be financially viable in the
sense of being able to meet the burden of
serving debt and whether the project will
satisfy the return expectations of those
who provide capital.
Management Assessment: Management
analysis focuses on management
capabilities in planning, organizing,
staffing, leading, implementing and
controlling along with its limitation.
Environmental Assessment: It is
concerned with the impact of the project
on environmental issues such as
environmental damage etc.
Project Life Cycle
The project life cycle refers to a logical
sequence of activities to accomplish the
project goals or objectives. The various
phases in the life cycle of a project are:
Project initiation
Project planning
Project execution and control
Project closure
1. Project Initiation
 The project initiation phase takes place with creative
ideas through the situation survey, external source
(from the external environment) and internal sources
(from the internal environment).
 Ideas are carefully screened in terms of objectives,
constraints and resource capabilities.
 Following this, a detailed project formulation is carried
out by developing project scope, objectives and
outputs, preliminary estimates of schedules, costs and
resources required.
 Lastly, a detailed project proposal is developed to move
the project ahead.
2. Project Planning and Design
 This phase includes the planning of all the
elements of the project so to be ready for
implementation.
 On the basis of technical, financial, management,
marketing, economic and environmental analysis,
detailed feasibility study is carried out and lastly
detail project is designed including development
of operating plans and performance standards,
allocation of roles and responsibilities,
determination of activities and resources and
setting down work schedule.
3.Project execution and control
 During the implementation phase, the project plan
is put into motion and the work of the project is
performed.
 It focuses on the performance of the project i.e.
design, construction, production, site activation,
testing, delivery etc.
 Moreover, in this stage, a series of management
processes are undertaken to monitor and control
time, resources, cost, risks, quality, changes etc. It
involves monitoring and evaluation and control of
project performance to provide feedback.
4. Project Closure
 During the final closure, or completion phase, the
emphasis is on releasing the final deliverables to the
customer, handing over project documentation to
the business, terminating supplier contracts,
releasing project resources, and communicating the
closure of the project to all stakeholders.
 The last remaining step is to conduct lessons-
learned studies to examine what went well and what
didn’t. Through this type of analysis, the wisdom of
experience is transferred back to the project
organization, which will help future project teams.
Process of project planning
Project planning is intellectual, systematic
and logical way of doing project work.
Project planning must be systematic,
flexible to handle unique activities,
disciplined through reviews and controls
and capable of accepting multifunctional
inputs.
The project planning consists of the
following steps:
Process of project planning Contii..

Understand Project
Objectives

Identify key project

stages
Prepare work
breakdown structure
Determine Logical
sequence of Activities
Estimate Time for
activities and Resource
Requirements
Allocate Responsibilities
for each activity to the
HR
Finalize project plan
Factors For Managing Project Quality

Different Researcher have differing views

on what constitutes a quality project. The
generally agreed parameters are that it
delivers the desired outcomes on time and
within budget. The factors that improve
project quality are:
 Policy: Managers generally considers three factors
in determining policy for quality i.e., the product
or service market, competition and image.
A review of market gives an idea of customers
expectations of quality and their willingness to pay
for it.
Quality levels in the competitive market also affect
policy because the company’s product must have the
quality to succeed in the market.
Besides they also need to consider the organizations
image because production of inferior quality product
may spoil long term interest of the organization.
Information: Information is important to
set a policy and to ensure that quality
standards are achieved.
The manager must acquire the right
information about customer needs and
expectations and the competitors quality
standard.
Engineering and Design: Project
engineering and design ensures new
products in less time with better quality at
lower cost.
Innovation and creativity helps to
design a product having superior quality.
Materials: Project manager must realize
that quality product can be produced only
by using good quality raw materials.
In this regard, manager need to
adopt a pre-control system with raw
material suppliers and they need to
terminate contract with lower quality
vendors.
Equipment: The use of automatic
machines, computer software and robotics
makes the output uniform and qualitative.
The use of modern equipment's and
machine provide opportunity for an
organization to compete in the market..
People: Well experienced and dedicated
employees can contribute more to improve
quality.
Constant Review: Successful project
managers diligently and regularly review
progress against the schedule, budget and
quality elements of the project.
Regular review allows problems to
be identified early so that corrective action
can be taken to keep the project on track.
Review also helps team members to learn
and improve their skills.
Plan-Do-Check-Act: The Plan, Do, Check, Act
cycle is fundamental to achieving project quality.
Plan desired and important changes using
available or new observed data.
Implement the change or do a small scale test.
Observe what happened in the change or test.
Act on the lesson learned. Can any prediction be
made on the basis for new methods.
Project Planning techniques
1) Network Analysis: Network analysis is a
technique for planning, scheduling and
controlling the progress of large and
complex projects involving large and
complex activities.
Here planning means determination of
activities and their order. Scheduling refers
introduction of time into the plan there by
creating a time table. For this two most popular
techniques are used i.e., CPM and PERT.
 Critical Path Method: CPM uses both time and
cost estimates for each activity but does not
incorporate any statistical analysis in determining
such time estimates in the network. The critical
path analysis consists of the following steps.
-Calculation of Time Schedule for each activity.
-Calculation of the Time Schedule for the
completion of entire project.
-Identification of Critical Activities and Critical
path.
Critical path is the chain of activities with
the longest time duration.
 The activities in the critical path is called
critical activities. They are critical in the
sense that delays in any of them results in
the delay of the completion of the project.
Programme Evaluation and Review
Technique (PERT): PERT assists the
business manager in planning and
controlling a project. It helps manager to
know the expected total amount of time to
complete each activity in a project.
It also helps to identify the critical activities
which need a careful watch and other non-
critical activities which do not affect the
length of the time duration.
 In PERT, it is usually assumed that the time
required to perform each activity is uncertain so it
is based on three time estimates for each activity.
-Optimistic time: The shortest possible time
required for the completion of an activity if all goes
extremely well.
-Pessimistic time: The maximum possible time the
activity will take if every thing goes bad.
-Most likely time estimate: It is the time an activity
will take if executed under normal condition.
Now the expected time for an activity is taken
equal to the mean of above three time estimates.
Expected time= (to+4tm+tp)/6
The variance and standard deviation of each
activity is calculated and the variance of total
activity is added which refers to the total time
required to complete the whole project.
Variance= square of (tp-to/6)
Standard deviation= tp-to/6
2) Input-output analysis ("I-O") is a form
of economic analysis based on the
interdependencies between economic
sectors and Input-output of the project.
This method is most commonly
used for estimating the positive or negative
impacts throughout an economy.
2. Input-output analysis Contii..
I-O models estimate three types of
impacts: direct, indirect and induced.
These terms are another way of saying
initial, secondary and tertiary impacts
throughout the economy.
By using I-O models, economists
can estimate the change in inputs across
industries due to a change in output in one
or more specific industries.
2. Input-output analysis Conti..
For example, building a bridge would
require spending on cement, steel,
construction equipment, labor and other
inputs. The indirect, or secondary,
impacts are due to the suppliers of the
inputs hiring workers to meet demand.
The induced, or tertiary, impacts result
from the workers of suppliers purchasing
more goods and services.
3. Financial Analysis: It studies the financial
sustainability of the project. The adequacy of funds is
assessed.
 Capital Requirements: The magnitude of the capital
required to fund the project is studied. It can be both
for fixed and working capital.
 Sources of Funds: The sources of funds to finance
capital requirements and their reliability are studied.
The sufficiency of funds to finance cost of project
implementation is examined. The possibility of
alternative financing sources is also examined. The
cost of capital is considered in the analysis
 Projected cash flow: The projected cash receipts
and payments are examined to assess the projects
capacity to meet financial obligations.
 Accounting and Reporting system: The
adequacy of account and reporting system to
provide timely information is examined.
 Project Profitability: Capital budgeting
techniques such as Pay Back Period, Internal Rate
of Return (IRR) and Net Present Value (NPV) are
used to analyze cash flow, profitability and
repayment capacity of the project.
Break-Even Analysis: The Break-Even
Analysis is done to analyze profitability.
The Break Even Point (BEP) is calculated
which is no-profit and no-loss point
(revenue=costs)
Measurement of Project Performance

There is no single set of measures that universally applies

to all companies. The appropriate set of measures depends
on the organization’s strategy, technology, and the
particular industry and environment in which they
compete. Some of important measures an organization
should benchmark to lead to project management success
are as mentioned below:
1) Return on Investment: (Net Benefits/Costs) x
100
 Sources of benefits can come from a variety of
measures, including contribution to profit, savings
of costs, increase in quantity of output converted
to a money value.
 Sources of Cost might include the costs to design
and maintenance of the project or project
management improvement initiative, cost of
resources, cost of travel and expenses, cost to
train, overhead costs, etc.
Return on Investment Contii..
For example:
-You bought a car for Rs. 1200
-You sold the car for Rs.1800
So Net profit= 1800-1200=600
ROI= (Net profit/Investment)*100
=(600/1200)*100=50%
2) Productivity:
Productivity is a relative measure of actual
output of production compared to the actual
input of resources, measured across time.
As output increases for a level of input, or as the
amount of input decreases for a constant level of
output, an increase in productivity occurs.
Therefore, a "productivity measure" describes
how well the resources of an organization are
being utilized to produce output.
3) Cost of Quality: Cost of Quality/Actual Cost
 Cost of quality is the amount of money a business
loses because its product or service was not done
right in the first place. It includes total labor,
materials, and overhead costs attributed to
imperfections in the processes that deliver products
or services that don’t meet specifications or
expectations.
 These costs would include inspection, rework,
replacements and refunds, complaints, loss of
customers, and damage to reputation.
4) Cost of Performance:
 The cost of performance index is a ratio that measures the
financial effectiveness of a project by dividing the budgeted cost
of work performed by the actual cost of work performed.

 Ifthe result is more than 1 then the project is under budget, which
is the best result. A CPI of 1 means the project is on budget, which
is also a good result. A CPI of less than 1 means the project is over
budget. This represents a risk in that the project may run out of
money before it is completed.
CPI Example
For example, assume a project has a budgeted cost of $10,000 but
actually cost only $8,000. Dividing $10,000 by $8,000 produces a
CPI of 1.25, which means the project is 25 percent under budget.
5) Schedule Performance: The CPI is only one aspect of determining
the progress of a project. The other is the schedule performance index,
or SPI. This is also a ratio that divides the budgeted cost of work to be
performed by the budgeted cost of work scheduled.
SPI Example
For example, assume a project has two people working full time, and
that each person costs the company $1,250 a week. One week times two
people at $1,250 a week equals $2,500, which represents the amount by
which the schedule is behind. If the budgeted cost of worked scheduled
at that time is $6,000, you subtract the $2,500 from that cost to come up
with the budgeted cost of work to be performed at $3,500. Dividing
$3,500 by $6,000 produces an SPI of 0.53.
SPI values under 1 are not good because they mean the project is
behind schedule. A value of 1 means the project is on schedule, and a
value more than 1 means the project is ahead of schedule.
6) Earned value analysis (EVA):
 It looks at the relationship between the CPI and
SPI, to judge how a project is doing.
 It often involves graphing CPI and SPI over the
life of a project. In a nutshell, the closer these
numbers are to 1, the more likely it is that a project
will be completed on time and on budget.
 The worst situation is to have one or both numbers
under 1. It may also mean that not enough money
and time were originally scheduled.
7) Customer Satisfaction:
Customer satisfaction towards project is
very important so the organization has to
check their customer expectations towards
their project.
Likert scale can be used to measure the
satisfaction level of customers.
8) Cycle Time:
The project life cycle defines the beginning and
the end of a project. Cycle time is the time it
takes to complete the project life-cycle. Cycle
time measures are based on standard
performance.
The shorter the cycle times, the faster the
investment is returned to the organization. The
shorter the combined cycle time of all projects,
the more projects the organization can complete.
9) Requirements Performance:
Meeting requirements is one of the key
success factors for project management. To
measure this factor you need to develop
measures of fit, which means the solution
completely satisfies the requirement.
A requirements performance index can
measure the degree to which project
results meet requirements.
10) Employee Satisfaction:
 An employee satisfaction is measured in
terms of pay, growth opportunities, job
stress levels, overall climate, extent to
which executives practice organizational
values, benefits, workload, supervisor
competence, openness of communication,
physical environment, trust etc.
11) Alignment to Strategic Business Goals:
Measuring the alignment of projects to
strategic business goals is an important
measure.
It’s determined through a survey of an
appropriate mix of project management
professionals, business unit managers, and
executives. Use a Likert scale from 1-10 to
rate the statement: Projects are aligned with
the business’s strategic objectives.