Objectives—
· To describe the technological &economic characteristics of the projects.
· To assess the impact of project output on economy.
· To assess the tangible & intangible benefits to be derived from the projects & effects of other projects.
· To assess the feasibility of different aspects of the projects.
· To identify the changes, addition or deduction of the projects.
· To assess the profitability of the projects.
Project appraisal methods………..
1. For short term projects
1.1 Playback period method—is the time required for the cumulative cash inflows from the projects to equal the initial cash inflows of the investment project.
If the cash inflows are equal each year , then the playback period is the ratio of the initial cash outflow to the annual cash inflows from the investment project.
When the annual cash inflows unequal, the playback period is calculated by finding the point in time where the cumulative cash inflows equal to the initial outflows.
Playback period=Invested capital/annual cash flow.
1.2 Return on investment method—the profit percentage is calculated. The more the profit percentage the more will be the project acceptable.
Profit percentage=(Avg. profit*100 ) / avg. invested capital.
2. For long term project----
2.1 Net present value/Present net worth method.
PNW is the sum of the discounted revenues less the sum of the discounted costs over a defined planning period.
IPR= (
)*100; where R= actual receipts after years ’t”, C=present value of cost incurred, t=no of years.
2.2 Benefit-cost Ratio (B/C) method…is obtained by dividing the discounted present value of the revenue by the discounted present value of the cost stream.
A project is worthwhile according this measure, when the B/C ratio >1. If B/C ratio <1>
B/C ratio= 
Where,
Rt= cash receipt at the end of year t
Ct= Investment at the end of year t
I i=Interest rate or discount rate.
T= No of years.
2.3 Interest rate of return(IPR) method……is defined as that rate of discount which equates the present value of the net receipts with the initial investment outlay: 
=
Alternatively, IPR is that rate of discount which equates the PNW of the cash flow to Zero.
The IPR is measured by the rate which project actually earns on money invested & is calculated by a trial & error solution.
· If PNW>0, chose a higher discount or interest rate & repeat the procedure.
· If PNW<0,>
· If PNW=0, is the IPR & procedure is completed.
Purposes of B/C analysis----------
· To assess the projects economic characteristics.
· To compare a no of projects designed to serve the same purpose.
· To determine which of a no of project designed to serve different purposes confers the largest net benefits on the economy.
Limitations of B/C analysis-------
· Legal constraints.
· Physical constraints.
· Administrative constraints.
· Distributional constraints.
· Political constraints.
· Financial constraints.
· Social & religious constraints.
Why social B/C analysis needed…..
In order to evaluate the real economic relevance of the project of society. Some b/c analysis which r relevant for the private investor, r irrelevant for the society as a whole.
The essence of b/c … is that it does not accept that the actual receipt adequately measures social costs.
| social B/C analysis | Private B/C analysis |
| Takes viewpoint as a whole | Individual participants |
| Taxes & subsidies treated as transfer payments | Taxes r cost & subsidies r income. |
| Normal market price not used | used |
| Includes pricing mechanism which works as that profits r not reasonable measures of net benefits. | Pricing policy always maximizing total profits & minimizing total costs. |
| Takes externalities into the accounts. | Does not account |
| Economic growth | Economic development |
| Means more output | Implies more output & changes in technical & institutional arrangement. |
| For particular time , increases GNP | For particular time , increases GNP, real per capital income & updating the standards of life. |
| Express qualitative concept only | both |
| May not denote the economic development of the country | denotes |
| Smaller in size & scope than economic devt. | Much wider & than economic growth |
Treatment of Uncertainty………….fact that the analyst cannot be sure today about anything that is going to happen in the future.
Guidelines for treatment of uncertainty …………..
1.Identify likely major sources if uncertainty for the project being analyzed & for each source establish.
2.Carry out a sensitivity analysis for the project using various combinations of different assumptions.
3.Determine appropriate ways of changing the design of the project or modify it to eliminate or major sources.
Major sources of Uncertainty in forestry project…..
· Natural Factors
· Technology & productivity Factor
· Financial & economic factors
· Human factors
