PROJECT APPRAISAL,

FINANCE, AND
MANAGEMENT
CIMAGE COLLEGE

abhijit prasad
abhijitprasad@gmail.com

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Project appraisal finance and management

Project is a great opportunity for organisation and individuals who achieve their business and non-
business more efficiently through implementing change.

Projects help us make desire changes in an organise manner with reduce profitability of the failure.

Projects differ from other types of work, process, task, procedure.

A project is defined specific finite activity that produces a measurable result under a certain percept
requirement.

Features-

Objective- A project has a fixed set of objective ones the project has been archives the projects
ceases exist.

Life span- A project continue endlessly it has to come to end what represents the end normally be
spell out set of objects.

Single entity- the project is one entity is normally interested to while responsibility centre. While the
participant in project are many.

Team work- a project call for team work the team again is constituted member belonging to
different discipline organisation or even countries.

Life cycle-

Importance of project-

1. Strategic element it is the process of linking the organisation structure and resources with
its strategy and ultimate objective.
2. Clear focus and objective
3. Leadership
4. Project planning
5. Reduce cost
6. Efficiency and effectiveness.
7. Subject matter expert

Types of project

Each project is unique and always different from other the following main type of project-

1. Construction project
2. Manufacturing project
3. Management project
4. IT project
5. Research project

According to project financing

1. Public project
2. Private project
3. PPP project

What do you mean by construction project?

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Construction project is a type of project which belongs to infrastructure and building. In construction
project there is always a new construction, renovation, etc. example- residential building, dams,
mining, road, bridge, water treatment, etc.

Manufacturing project is a type of project in a which a new product is manufactured. Example-

vehicle, new cell phone, equipment, laptop, shoes, cosmetics, etc.

Management project is a type of project which belongs management only there is no visible results.
Example – marketing campaigns, new computer program production inside in an organisation,
supply chain management

IT project belong to IT infrastructure and technology. Its project deal with software development.
Example- a large scale computer software, a mobile app, software upgrade, client and vendors, etc.

Research project is a temporary and scientific project this can be new or an expansion on past work
research project are generally period unpredictable result and mostly used to develop further
knowledge. Example- construction analysis, case study project, human DNA, study of ancient
civilisation.

Project are further classified

1. Project financing
i) Public project – public project is funded owned and operate by govt. example – road,
dam, parks, public education and health care unit and etc.
ii) Private project – private project is funded own and operated by individual, group,
organisation to get profit. Example- retail, sole enterprises, hotel, MNC, etc.
iii) Public private partnership project- public private partnership project is naturally funded
owned and operated by govt and public sector this are generally long-term project.
Examples- PPP project vary country to country in brazil urban railway line/for state
highway MG 016.
2. Contract agreement- Project types according to contract agreement for any project there is
an always a contract according to a contract following are the main types of the project.
i) Fixed price contract project
ii) Unit price contact project
iii) Cost plus contract project
iv) Time and material contract project
v) Build operate transfer contract project
3. Project delivery method- a project delivering method used by agencies or owner for
organising and financing decision, construction, operations, maintenance services for a
structure or facility by an entering into legal agreement with one or more entities. In other
words, project delivering method consist of planning designing construction and other
services necessary for organising executing and completing a building facility.
project act according to –
i) Design build project
ii) Design construct project
iii) Construction manager risk
iv) Construction management
v) Integrated project

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Steps of identify the project

1. Goal of the project

2. Finance of the project
3. Method to complete the project
4. Identify the target group of the project.

Project life cycle-

What do you mean by project life cycle?

Meaning of project life cycle – each project has a life time and during this life time it passes to
different phases these phases are called project life cycle. Project life cycle is a framework to manage
to any types of project. It provides guideline to project managers for successful completion of
project. Typically, a project life cycle is consisting of following four phases-

1. Initiation- Project initiation stages understand the goal priorates deadlines and risk of the
project.
2. Planning- Planning stage outline the task and timeline required to execute on the project.
3. Execution- Project execution stage turns your plan into action and monitor project
performance
4. Closing- Analyse results, summarise key learning and plan next step.

In other word the life cycle of system consists of the following phases.

1. Conception
2. Definition
3. Acquisition
4. operation
5. termination

In some methodology monitoring and control is also consider a project life cycle phase. Project
manager follow the life cycle phase to manage any project from start to finish.

Project management-

Project management helps coordinate the members and the resources available for a project for the
achieving the organisational objective. It is include developing a project plan which includes defining
project goal and objectives, specifying task or how goals are to be archive what resources are
required. It also associates budgets and taglines for a completion of the project.

Project management is the process of leading the work of the team to achieve goal and meet
success criteria at a specified time. The primary challenges of project management are to achieve all
the project goal with in the given constant. This information is usually described in project
documentation created at the beginning of the development process. The primary constant are
scope, time, quality and budget. The secondary challenge is to optimize the allocation of necessary
inputs and apply them to meet pre-defined objectives.

The objective of project management is to produce a complete project which complies with client
objective.

Scope of project management-

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The scope of essential project management is covered in five different phases. They are mainly
initiating, planning and development, project executing, project monitoring, project closing. To
successfully complete the given project a project manager has to have a good understanding of five
basic phases of project.

1. The 1st phase of the project as the name suggest initiation the project. A business case that is
benefit or the reason to do the project is to presented and then the project is define at the
macro level. The project manager 1st the flexibility study in order to know whether the
objective is achievable and thus can be launch.
2. Planning and development of project after the project that go head it is initiated the project
manager moves to the second phase known as the. in this phase the project manager
prepares a road map which focuses on archiving the objective of the project in a systematic
way.
3. the actual work of project happens in this phase they are many responsibilities get done in
this phase. A team is developed for the project. Resources are assigning the execution of the
2nd phase is done know.
4. Project monitoring 3rd and 4th phase of project management go hand in hand in the process
of project management. During this phase the project is monitored through actively in order
to know whether the project is going as per the planning.
5. Project closing this is the phase bring about the completion of the project and objective of
the project is achieved.

Who is project manager –

Project managers play the lead role in planning, executing monitoring, controlling and closing
project. They are accountable for the entire project scope, project team, resources, success or
failure of the project.

What is the role of project manager?

Project manager are responsible for planning, organising and directing the completion of specific
project for an organisation while assuring this project on time and within scope.

Who is a good project manager?

One of the qualities of a good manager is being good communicator so that he can connect with
people at all level. The project manager must clearly explain the project goals as well as each
member takes its responsibilities, feedback.

What is the project team?

The project team is a group of individual teams together their purpose to achieve a specific business
task or goal. The project team can be created on a temporary basis or vary long duration. A project
manger is also integral path of project team. The team and manager collectively together contribute
to the success of the project.

Types of project manager – there are four types of project manager

1. Project expeditor – this are the individual who speed their work and archive unity in the
team with the help of the communication. They are the project centre of communication to

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 the general manager they are not really managers as serve as translators of technical concept into business
concept including cost schedules and market.
2. Project coordinators
3. Project matrix manager- additionally it include planning, controlling and executing, directing the project. They
also response directly to administrative to fast correction in error or defect of project.
4. Pure project manager- these people direct project organisations is of people who report directly to them. They
achieve unity of command and are primarily integrators and generalists rather than technical specials. They must
balance technique factor with schedules, cost, resources, and human.

In other words, the project manager

1. Technical project manager – IT sector

2. Adventurers project manager – take higher risk and higher profit
3. Expert project manager – jump over those specific bounders those seeking (attractive)
4. Supportive project manager

Scope of project management

In project management scope is define future and function of products are the scope of work needed to finish a project
scope involve getting information require to start a project on the future the project would have would meet its stake
holder requirement. In other words, scope can refer to either project scope or product scope. It is important know the
difference

1. Project scope- project scope is the common understanding among stake holder about what goes into the project
and what factor define its success. A project scope is made up of the specialisation outline in the requirement.
2. Product scope is defined as the function and future that characterised of the product or a service.

Note- A stake holder is a party that has interest on a company and can either effect or to be affected in the business.

Project appraisal- it is technique used to test whether the project undertaken feasible or not. It is an essential tool in
regeneration or renewable of a project. Project appraisal helps in providing early warnings or problems that may occur
during the development of the project. It involves measuring the difference between total efforts actually consumed by a
project and planned efforts.

Project appraisal is a largest term that can be divided into-

1. Technical – clearly every project must be technical feasible. Technical appraisal provides a comparative review of
all technique aspect of the project such as redreaming, judgment on merit on technical proposal and operating
cost. In other word we can say that by technical appraisal of a project we mean assessment of its basics technical
and functional feasibility of project. Besides cost and schedules project performance depends on how will the
project is meeting the technical meeting the technical requirement of in the product.
2. Environmental – is a systematic process by which account is taken off by the environmental dimension of
development inventions throughout the whole project cycle. Its process of identifying opportunities and threats
facing an organisation and environmental appraisal in plays an essential role in business management by providing
possible opportunities or threats outside the company in its external environment. The purpose of an environmental appraisal
is to help to develop a plan by keeping decision maker within an organisation.
Factor affecting environmental analysis-
i) Organisational related factor
ii) Strategist related factor
iii) Environmental related factor
3. Managerial appraisal- according to H.koontz has develop concept of managerial appraisal that is appraising manager. According
to this concept the manager attends the organisational objective by performing the basic managerial functions. Planning,
organising, leading, motivating, staffing and controlling. Each of this function can be perform by performing a number of series
of activities.

one of the main preoccupations of management in any organisation and in project organisation is the allocation of scar resources.
These resources include man power, material, facilities, and financial resources. For example- performing staffing function requires
performing a series of activities like analysing job of his department, Planning for human resources, deciding upon internal or
external requirement, developing resources and requirement technique. Thus, each function and sub function of manager is
elaborated into a series of activities. This activities in this model are taken as behaviour and standards of performance.

SECTION-3

NEED AND TECHNIQUES FOR RANKING OF PROJECT-

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IRR (internal rate of return)- the internal rate of return is a discount rate of return is a
discount rate that’s makes a net present value of a project 0. In other words, it is expected
compounded annual rate of return that will be earn on a project or investment. In the example
below-

An initial investment of Rs 50000 has a 22% of IRR

Net present value- NPV is the difference between the present value of cash inflow and present
value of cash outflows over of period of time. Net present value is use in capital budgeting and
investment planning to analyse the profitability of projected investment or a project.

NPV = todays value of expected cash flow – todays value of invested cash.

Positive net present value indicates that the projected earning generated by a project or an
investment.

A negative net present value indicates net loss of project.

NPV method- this method is one of the discounted cash flow techniques and it recognises the time
value of money.

Payback method-Under payback method an investment project is accepted or rejected on the

basis of payback period. Payback period means the period of the that a project requires to recover
the money invested in it is mostly expressed in year.

According to payback method the project that promises a quick recovery of initial investment in
consider desirable. If the payback period of a project shorter then equal to the management
maximum desired payback period. The project is accepted otherwise rejected.

Average rate of return or Accounting rate of return or Return on investment.

ARR=Average profit/ Average investment

Average investment= (initial investment + scrap vale)/2 + Additional working capital

Average profit= Initial investment – Depreciation – Tax / No. of year

These methods take into account the earning from the investment over its whole life.

ARR=Profit after tax / value of investment

This method relates income with capital investment it is a ratio which express profit as percentage of
capital invested.

Net terminal value method –

Terminal value during the evaluation of a company using discounted cash flow not all the cash flow till infinite.
And hence after a certain number of years the possible value of a company and hence after a certain number
of years. The possible value of a company assets or approximate value of future cashflow are used as terminal
value. And the discounted cashflow carried upon.

Terminal Value = (free cash flow*(1+G)/Weight average cost of control.

Steps in calculating terminal value-

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 1.

SECTION 2-

Financial appraisal- A essence of financial appraisal is the identification of all expenditure and
revenue over the life time of the project with a view to assessing the ability of project to achieve
financial sustainability and satisfactory rate of return. The appraisal is usually done at constant
market piece and in a cashflow statement format.

Note- the cashflow statement sets out the revenue to be derived from a project this revenue can
take several modes. This assist to identify the product and services from the project sold through
normal commercial channels as well as any commercial exploitable by product and residue.
Revenue valuation is the simply matter of estimating the sales value of this product and services.

To determine whether the financial cost and return are properly estimated and whether the project
is financially viable following minimum details are determined in the financial appraisal-

1. Total cost-
2. Overhead and management expenditure
3. Opportunity cost
4. Other cost
5. Return on investment over project life
6. Net present value
7. IRR, etc.

Financial appraisal also evaluates capacity of revenue producing investment from the standpoint of
the entity.

project cost estimation is the process of predicting the quantity, cost and price of the resources
required by the scope of the project. Less than 1 year is short term finance, 1-5-year middle term
finance, 5year and more long-term finance. Since cost estimation is about the prediction of cost
rather than counting the actual cost, a certain degree of uncertainty is involved.

types of cost estimating-

1. Detailed cost estimate- A detailed estimate is prepared after the approval of a preliminary
estimate done by a component dedicated construction estimator. In this estimate, every
item of work is measured properly and the cost is calculated individually.
2. Preliminary cost estimate- this cost estimate is also called an abstract cost estimate or
budget estimate. Generally, it is prepared during the preliminary phase of the project
planning to get an idea about the approximate cost of the project.
3. Plinth area cost estimate. - this cost estimate is prepared by considering cost per plinth area
of a similar type of construction present within the locality. This is an area covered by
external dimension of building at the floor level.
4. Revised cost estimate
5. Cube rate cost estimate
6. Approximate quantity method cost estimate
7. Supplementary cost
8. Annual repair cost estimate.

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The working capital requirement of a business is the sum of current assets or the amount of funds
necessary to cover the cost of operating expenses of the business.

Gross Working Capital – It is the capital invested in total current assets.

Working capital- It is the excess of current assets over current liability

Types of working capital-

Permanent working capital- Fund necessary to carry the operation of a business.

Temporary working capital- seasonal or special requirements for funds.

Semi-variable working capital- the fund requirement remains same up to a stage, then increase with
sales and time.

Factor determining of Working Capital-

1. Nature of Business
2. Size of business
3. Production Cycle
4. Business cycle
5. Production policy
6. Credit policy
7. Availability of Raw material.
8. Manufacturing cycle- time spend required for conversion of raw material into finished good
is a block period. The period in a reality extend before and after work in progress. This cycle
determines the need of working capital. In case of industry in long manufacturing process or
production cycle more funds are required for working capital.

How to calculate working capital requirement – The amount of finance a business needed to carry
out this day-to-day trading activity is referred to as the working capital requirement or working
capital funding gap.

Working capital requirement formula-

Net working capital requirement = inventory + Accounts receivable – Account payable.

Sources of Fund- Fund means change in working capital or working capital is a excess of current
asset over current liability. Therefore, increase in working capital that is increase in fund or vice
versa. We can say that sources of fund is also known as inflow of cash. For ex- Cash proceeds from
sale of fixed asset, Cash proceeds from issue of share, cash proceeds from issue of debenture, etc.

classification of sources of fund.

1) On the basis of period-

i) Long term- Equity share, retain earning, preference share, debenture, loan from
financial institution, loan from bank. The long-term sources fulfil the financial
requirement of an enterprises for a period exceeding 5year.
ii) Medium term- Loan from banks, public deposits, loan from financial institution, lease
financing. The medium-term source are required more than 1 year and less than 5 year.
iii) Short term- The short-term fund are those which are required for a period not exceeding
1 year. Trade credit, loan from commercial bank, commercial paper.
2) On the basis of ownership. - There are two types of fund.

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On the basis of ownership sources of fund can classified two categories-

a) Ownership fund-
i) Equity share
ii) Retained earning
b) Borrowed fund-
i) Debenture
ii) Loan from bank
iii) Loan from financial institution
iv) Public deposits lease financing
2) On the basis of sources of generation
Internal sources – Equity, retained earning
External sources- Preference share, debenture, Loan from bank, Loan from financial institution,
Public deposits lease finance.

Term loan includes loan offer by monetary organisation and commercial bank. Term loans forms the
secure sources of finance for developing new project as well as other purpose. Such as expending
updating and renovating the existing organisation. The two types of term loan available in India.
Rupee term loan and foreign currency term loan.

Capital Budgeting is the collection of total that planner use to evaluate the desirability of acquiring
long term assets. Organisation have developed many approaches to capital budgeting six approach-

1. Payback period
2. Accounting rate of return
3. Net present value
4. Internal rate of return
5. Profitability index

In other word capital budgeting is a long term investment decision for functioning of acquire
upgrade replaces the assets. Such as land and building, plant and machinery and different types of
long term of project.

According to charlos.T.Horngreen “Capitalisation budgeting is the long term planning to make and
finance proposed capital analytics.

Nature of capital budgeting-

1. Capital budgeting plan involves a huge investment in fixed assets.

2. Capital budgeting decision involves exchange of current fund benefit to be achieve in future.
3. The funds are investment non-flexible long-term fund.
4. The future benefit are expenditure rate to be realised over of series of year.

Significance of capital budgeting-

1. Substantial capital outlay

2. Long term implication
3. Strategic in nature.

Scope of capital budgeting-

1. Construction of new building

2. Renovation of existing building

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 3. Purchase of technology from foreign company
4. Building a production facility.

Capital budgeting process-

1. Project identification and generation- the first stage toward capital budgeting is to generate
a proposal for investment there could be various region for taking a investment in a
business.
2. Project screaming and evaluation- this step mainly involves selecting all correct criteria to
judge the desirability of a proposal. This has to match the objective of the firm to maximise
the market value. The tool of time value of money comes handy in this stage.
3. Project selection
4. Implementation-
5. Performance review

Factor effecting capital budgeting-

1. Availability of fund- working capital

2. Structure of capital- capital return
3. Management decision- Need of the project
4. Accounting method- govt policy
5. Taxation policy- Earnings

Capital budgeting decision- there are two way

1. Wealth maximisation
2. Profit maximisation

Projected financial statement –

Projected financial statement take into account past financial trends, market condition, possible
changes, management expectation to future financial picture. Projected financial statement
incorporate current trend and expectation to arrive at a financial picture that management believes
it can attend of a future date. At a minimum projected financial statement will show a summery level
income statement and balance sheet. This information is typically derived from a revenue trends
line. As well as expenses percentage that are base on a current proposition of expenses to revenue.

Future of projected financial statement –

1. Statement of cash flow

2. Expenses projection that include step cost for measure point at which revenue increase or
decrease.
3. Consideration of pace at which the business can reasonable grow based on its prior history.
4. The ability of business to attract the funding needed in order to accomplished a financial
result statement in the plant.

How to prepare projected balance sheet-

1. Calculate cash in hand and cash at bank- If you have no any book record of your cash, you
can show cash in hand after checking your cash balance in business's pocket. You can check
also available balance at bank. Both will be your current assets in balance sheet.

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 2. Calculate fixed asset- Make the list of assets whose benefits are you taking more than one
year. Check its price from cash memo or past bills. Try to calculate time of its using. If you
have used it for 3 years. Its value will surely decrease due to depreciation. Charge 10% to
20% per year on every fixed asset up to used period with any method of depreciation. Now,
you will get current cost of fixed asset. Show it in the asset side of balance sheet.
3. Calculate value of financial instrument-
4. Calculate your business earning
5. Calculate your business liabilities
6. Calculate business capital

Economic Appraisal- An economic appraisal provides a systematic and technically sound way of
addressing these questions. It never provides complete answers but it nevertheless provides an
informed base from which to make further arguments.

Economic analysis attempt to assist to over all impact of a project in achieving the national economic
objective of the country concern. Economic analysis is valuable to measure the cost effectiveness of
immunisation program of the cost.

An economic analysis is the process followed by the expert to understand how key economic factor
affect the functioning the organisation industry, region, in any other population group with the
purpose of making wiser decision for the future. Economic appraisal is also know as economic
analysis.

Economic appraisal design to assist in defining problem and finding solution. That offer the best
value for money. This specially important in relation to public expenditure and is often use as a
vehicle for planning and public investment relating to policy, programs and project.

Economic appraisal principal-

 Principal of appraisal are applicable to all decision even those concern with small
expenditure. How ever the scope of appraisal can also be very wide.
 Good economic appraisal leads to better decision and value for money.

Types of economic appraisal-

1. Cost-Benefit analysis (CBA)- Some time also called benefit cost analysis. Is a systematic
approach to estimating the strength and weakness or alternative use to determine
2. Cost effectiveness analysis-

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