Project appraisal is the process of assessing, in a structured way, the case for proceeding with a project or proposal, or the project’s viability. It often involves comparing various options, using economic appraisal or some other decision analysis technique.
Appraisal is the evaluation of the overall ability of the feasible project to succeed. It is done after the feasibility study of the project has been completed. In other words, project appraisal is an overall assessment of the relevancy, feasibility, and sustainability of a project prior to making the decision whether to undertake it or not.
Project appraisal document generally consists project introduction, objectives, and scope, techniques of implementation, organization description, output, and benefits of project, project monitoring and evaluation etc.
Project appraisal is done two answers following two basic questions:
Will the project as designed meet the objectives and needs of country and society?
How does the project compete and compares with other feasible projects in terms of funds and other resources?
Appraisal Process
- Initial Assessments
- Define problem and long-list
- Consult and short-list
- Evaluate alternatives
- Compare and select Project appraisal
Types of appraisal
- Technical appraisal
- Project appraisal
- Legal appraisal
- Environment appraisal
- Commercial and marketing appraisal
- Financial/economic appraisal
- organizational or management appraisal
- Cost-benefit analysis
- Economic appraisal
- Cost-effectiveness analysis
- Scoring and weighting
Economic Appraisal
It is a type of decision method applied to a project, program or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic appraisal is a key tool for achieving value for money and satisfying requirements for decision accountability. It is a systematic process for examining alternative uses of resources, focusing on assessment of needs, objectives, options, costs, benefits, risks, funding, affordability and other factors relevant to decisions.
The main types of economic appraisal are:
- Cost–benefit analysis
- Cost-effectiveness analysis
- Scoring and weighting
Economic appraisal is a methodology designed to assist in defining problems and finding solutions that offer the best value for money (VFM). This is especially important in relation to public expenditure and is often used as a vehicle for planning and approval of public investment relating to policies, programs and projects.
The principles of appraisal are applicable to all decisions, even those concerned with small expenditures. However, the scope of appraisal can also be very wide. Good economic appraisal leads to better decisions and VFM. It facilitates good project management and project evaluation. Appraisal is an essential part of good financial management, and it is vital to decision-making and accountability.
Cost–benefit Analysis
Cost benefit analysis (CBA), sometimes called benefit cost analysis (BCA), is a systematic approach to estimating the strengths and weaknesses of alternatives (for example in transactions, activities, functional business requirements or projects investments); it is used to determine options that provide the best approach to achieve benefits while preserving savings. The CBA is also defined as a systematic process for calculating and comparing benefits and costs of a decision, policy (with particular regard to government policy) or (in general) project.
Broadly, CBA has two main purposes:
To determine if an investment/decision is sound (justification/feasibility) – verifying whether its benefits outweigh the costs, and by how much;
To provide a basis for comparing projects – which involves comparing the total expected cost of each option against its total expected benefits.
CBA is related to (but distinct from) cost-effectiveness analysis. In CBA, benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their net present value.
Closely related, but slightly different, formal techniques include cost-effectiveness analysis, cost–utility analysis, risk–benefit analysis, economic impact analysis, fiscal impact analysis, and social return on investment (SROI) analysis.
Cost–benefit analysis is often used by organizations to appraise the desirability of a given policy. It is an analysis of the expected balance of benefits and costs, including an account of foregone alternatives and the status quo. CBA helps predict whether the benefits of a policy outweigh its costs, and by how much relative to other alternatives, so that one can rank alternate policies in terms of the cost–benefit ratio. Generally, accurate cost–benefit analysis identifies choices that increase welfare from a utilitarian perspective. Assuming an accurate CBA, changing the status quo by implementing the alternative with the lowest cost–benefit ratio can improve Pareto efficiency. While CBA can offer a well-educated estimate of the best alternative – perfect appraisal of all present and future costs and benefits is difficult –, perfection in terms of economic efficiency and social welfare are not guaranteed.
- CBA Process – The following is a list of steps that comprise a generic cost–benefit analysis.
- List alternative projects/programs.
- List stakeholders.
- Select measurement(s) and measure all cost/benefit elements.
- Predict outcome of cost and benefits over relevant time period.
- Convert all costs and benefits into a common currency.
- Apply discount rate.
- Calculate net present value of project options.
- Perform sensitivity analysis.
- Adopt recommended choice.
CBA Evaluation – CBA attempts to measure the positive or negative consequences of a project, which may include
- Effects on users or participants
- Effects on non-users or non-participants
- Externality effects
- Option value or other social benefits.
