Introduction

Project Appraisal is the analysis of costs and benefits of a proposed project with a goal of assuring a rational allocation of limited financial resources amongst alternate investment opportunities with the objective of achieving specific goals. Project Appraisal is mainly the process of transmitting information accumulated through feasibility studies into a comprehensive form in order to enable the decision maker undertake a comprehensive appraisal of various projects and embark on a specific project or projects by allocating resources. Project Appraisal is the process of analyzing the technical feasibility and economic viability of a project proposal with a view to financing their costs. Project appraisal is the process of examining the various dimensions of a project be it technical, financial, social, environment and providing an assessment of the projects likelihood for success and its viability. It is the process of assessing and questioning proposals before resources are committed. It evaluates a projects ability to meet its stated objectives and to provide long term Economic growth in the larger framework of local and national needs. The project appraisal process is an essential tool in regeneration and neighbourhood renewal. An effective project appraisal offers significant benefits to partnerships and, most importantly, to local communities. A good appraisal justifies spending money on a project. It is an important tool in decision making and lays the foundation for delivery and evaluation. Getting the design and operation of appraisal systems right is important. The proper consideration of each of the components of project appraisal is essential. For the following reasons project appraisal is very much important It is a capital investment decision It has long term effects Decision once taken is irreversible Expenditures are high

The various Factors considered by Financial Institutions while appraising a project are: Market analysis: demand forecasting

Technical analysis: it seeks to determine whether the perquisites for successful commissioning of the project have been considered and reasonably good choices have been made with respect to location, size, process, etc.

Financial analysis: seeks to ascertain whether the proposed project will be financially viable in the sense of being able to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those who provide the capital. The aspects which have to be looked into while conducting financial analysis are: Investment outlay and cost of project Means of financing Cost of capital Break-even point Cash flows of the project Investment worthwhileness judged in terms of various criteria of merit Projected financial position Level of risk

Sensitivity analysis In the evaluation of an investment project, we work with the forecasts of cash flows. Forecasted cash flows depend on the expected revenue and costs. Further, expected revenue is a function of sales volume and unit selling price. Similarly, sales volume will depend on the market size and the firms market share. Costs include variable costs, which depend on sales volume, and unit variable cost and fixed costs. The net present value or the internal rate of return of a project is determined by analyzing the after-tax cash flows arrived at by combining forecasts of various variables. It is difficult to arrive at an accurate and unbiased forecast of each variable. The reliability of the NPV of variable underlying the estimates of net cash flows. To determine the reliability id the projects NPV or IRR, we can work out how much difference it males in any of these forecasts goes wrong. We can change each of the forecasts, one at a time to at least three values: pessimistic, expected, and optimistic. The NPV of the project is recalculated under these different changing each forecast is called sensitivity analysis.

Sensitivity analysis is a way of analyzing change in the projects NPV (or IRR) for a given change in one of the variables. It indicates how sensitive a projects NPV (or IRR) is to changes in particular variables. The more sensitive the NPV, the more critical is the variable. The following three steps are unsolved in the use or sensitivity analysis:

Identification of all those variables, which have an influence on the projects NPV (or IRR). Definition of the underlying (mathematical) relationship between the variables. Analysis of the impact of the change in each of the variables on the projects NPV.

The decision-maker, while performing sensitivity analysis, compute the projects (or IRR) for each forecast under three assumptions: (a) pessimistic, (b) expected, and (c) optimistic. It allows him to ask what if question. For example, what (is the NPV) if volume increase or decreases? What (is the NPV) if variable cost of fixed cost increases or decreases? What (is the NPV) if the selling price increases or decreases? That (is the NPV) if the project is delayed or outplay escalate or he questions can be answered with the help of sensitivity analysis. It examines the sensitivity of the variables underlying the computation of NPV or IRR, rather than attempting to quantify risk. It can be applied to any variable, which is an input for the after-tax cash flows.