ECONOMIC & MARKET APPRAISAL

ECONOMIC &

MARKET APPRAISAL

Economic Appraisal of a project involves providing information to the decision makers at various levels of the orgn about a project. The different aspects of economic appraisal includes environmental appraisal and mgmt appraisal. Social cost-benefit analysis is a project evaluation technique which helps to judge the project in terms of their impact on the economy. This is evaluated by using parameters reflecting national goals and social objectives.

Need for Economic Appraisal – Concept of Economic Appraisal : The Economic Appraisal provides best information to the decision makers in order to achieve the organizational objectives. Decision makers plan more than one strategy for achieving the same objectives. The Economic Appraisal help evaluate the optimal economic life of assets, reorganization of assets and decide whether the asset should be renewed or replaced.

Economic Appraisal techniques also require financial analysis for decision making. Financial analysis provides the cash flow requirements of the project and the financial return of the orgn. For effective Economic Appraisal following points should be considered –

- Capital planning and asset mgmt in all units of an orgn.- Economic Appraisal should be

implemented in the development and approval stage of new capital.

The Economic Appraisal should be in detail and relevant with the nature and size of expenditure.

Benefits of Economic Appraisal : The Economic Appraisal improves the allocation of public sector resources to ensure that the Govt’s objectives are achieved. Better resource allocation also improves the future growth. Economic Appraisal also influences the participants of the capital work process. For example, Economic and Financial Appraisal of Transport Project work include an economic

appraisal of a proposal to invest in diesel engine exhaust fume extraction eqpt for Translink’s maintenance shed in Belfast.

Need for Economic Appraisal : For a private commercial entrepreneur, the choice of a particular project for investment is relatively straight forward, as he knows his technical and financial objectives. In public investments, on the other hand, the planner may have to evaluate and choose between various projects on the basis of national interests and objectives, and the broad allocation of resources to various sectors.

In choosing one project over the other, the planner must evaluate and analyse the effect on employment, consumption, GNP, savings, FEx earnings, income distribution, regional development and a host of other relevant factors with respect to national interest and objectives. In other words, in undertaking social cost-benefit analysis, one must accept the fact that all costs and benefits are relevant, irrespective of whom they accrue to, and whether or

not they are paid for.

A private project orgn or entrepreneur faces specific market prices based on damand and supply factors and does not usually have to worry about what these mkt prices represent for the nation as a whole. The commercial orgn can make project investment decisions based on this information. For a planner handling public investment, the information tends to be flexible. For example, a co

making soap keeps concerned with factual information regarding profitability, rates of return on investment, market share etc. Similarly, a tobacco co confines its business analysis to profit and loss statements, or statements of assets and liabilities, whereas a national planner has to evaluate the social costs of smoking on the health of the people.

The inability of commercial profitability to reflect national gains is fairly well accepted. But rejecting the conventional financial appraisal methods as a basis of planned choice creates a gap that social cost-benefit analysis (SCBA) is reqd to fill.

- First SCBA has to provide a basis for evaluation by estimating prices that will be appropriate for the market.- Secondly, it has to serve as a substitute for pure ad hoc decision-

making. A project evaluator may be able to analyse any project by making appropriate assumptions, such as the interest (or discount) rates, or the consumption habits and the value of FEx earnings. If the project evaluators are not made to use a consistent set of parameters and values for SCBA, the project choice is liable to personal bias.

It is important to remember that SCBA is not a mere technique, but it is a general approach. Projects are judged in terms of their impact on the economy and this is evaluated by using parameters reflecting national goals and social objectives.

The evaluation of a project by SCBA begins by clearly stating the relevant social objectives. Some of these social aims and benefits are –

- Accelerated economic and social development of the region in which the project is carried out.- Distribution of benefits to the largest number of people, especially the poorer sections of the society.- Increased economic and social productivity and increased consumption of goods and services.- Generation of employment and job opportunities.- Production of exportable goods and

services and minimization of imports of the goods.

The information reqd for SCBA is substantially greater than that reqd for the more conventional financial appraisal of a project. On the one hand, more detail is reqd in the description of the benefits and the costs of a project to ensure that the items are distinguished according to the contributions they make to different objectives and according to

the need for adjustment of the mkt prices. On the other hand, considerable information is reqd at the national / regional level, regarding the relative weightage to be given to alternative objectives. Information is also needed regarding the parameters used in the adjustment of mkt prices to reflect social opportunity costs. The latter information is common to the social evaluation of all projects and must be provided by the national planners.

Economic Appraisal of an Electronic Postal Meter – Introduction : As a part of the modernization programme in the Eight-Five-Year-Plan, the Dept of Posts (DOP), Govt of India plans to introduce 500 electronic postal meters in selected Pos in the country. DOP proposes to computerize some of the operations in the PO counters, in a manner similar to the computerized reservation system of the Indian Railways. Each selected PO counter is to have an electronic postal

meter that can quickly and accurately weigh a postal article and calculate the tariff (postage) to be paid by the customer. DOP is convinced that the proposed system will improve speed, accuracy and qlty of service rendered to the postal customers.

In order to meet the above expressed need of DOP, M/s Bradshaw India Ltd (BIL) wishes to gear up for the mfr and supply of 500 electronic postal meters.

Since the co has been in the business of making various electronic instruments, the proposed venture would not be entirely new to it. However, in order to meet the specs of cost, duration and performance reqmts satisfactorily, BIL decides to adopt a project mgmt approach.

Systems Design

Need Analysis : Since BIL intends to submit a tender bid to the DOP, the co has assumed that the short-term need in the project is to fulfil the reqmt of 500 electronic postal meters. DOP has specified that the system should be capable of weighing postal articles, up to a maximum weight of 6 kgs, with an accuracy of ± 2gms. After an article has been weighed, the system should

automatically calculate and display thepostal tariff based on the weight, destination and type of postal service (ordinary, regd, speed post etc.). The above need has been felt since DOP wishes to improve the speed, accuracy and qlty of service to the public.

System Identification : Before submitting a tender bid, BIL conducted a system identification exercise for its assessment of the reqmts in the project. Table

below outlines the identification of the system in terms of the outputs, inputs, design parameters and the criteria for the evaluation of alternative solutions.

System identication for the electronic postal meter project

S.No. Parameter Item description Constraint

1 Desired outputs

Accurate weight measurement +2gm for load up to 6kg

Computation of postal tariff Provision of flexibility

Output display Without fluctuations

2 Undesired outputs Unstable reading Minimum making 500 units

3 Controllable inputs

R & D and production facility For making 500 units

Capital Less than Rs.46 lakh

Labour and technology As available

4 Uncontrollable inputsPower Continuous

Supplies for sub-contractors Reliable

5 Design Parameters

Weighing pan size 30 cm x 36 cm

Weighing capacity Up to 6kg

Accuracy ±2gm

Reliability Maximum

User-friendliness High

6 Criteria for evaluation

Effectiveness High

Accuracy ±2gm

Production target 500 Numbers

Return on investment Maximise

The basic desired output is a weighing system that can electronically measure weights up to 6kgs, with an accuracy of ±2gms. The system should be able to compute postal tariffs, with provision for flexibility in the tariff rates, based on destination, type of service etc. The display of the weight and tariff should be stable and continuous. The major controllable inputs to the system consist of the facilities for R & D, mfr and

testing; the manpower reqd; capital needed (not exceeding 46 lakhs as specified by BIL); and the available technology. The uncontrollable inputs include the power supply (which BIL has experienced to be erratic), and reliability of sub-contractors and vendors to supply parts and components.

The design parameters of the electronic postal meter are the size of the

weighing pan (fixed by DOP as 30 cm x 36 cm), the weighing capacity (upto 6 kgs), accuracy (of ±2gms), reliability and user-friendliness, ie. the system should be rugged and simple enough to be used by the typical DOP staff.

BIL has set four criteria for evaluation of alternative solutions, that include the sytem effectiveness, accuracy, the ability to meet production target and the maximization of the return on investment.

Feasibility Study : Based on the preceding needs analysis and system identification, BIL has identified the following two systems as possible solutions to meet the reqmts of an electronic postal meter.

- An RS232C-based system is one which consists of two sub-systems interconnected by an RS232C serial port cable. The first sub-system, termed as the ‘host’, contains a load

cell to measure the weight, and a Central Processing Unit (CPU), to process the data transmitted by the load cell, and to convert the analog signal of the load cell to a digital signal. The digital signal is displayed on the the host and the processed data is transferred to a serial transmitter recorder. This is connected to the ‘receiver’ sub-system by an RS232C cable. The receiver’s end is a personal computer (PC) system which takes the

processed data from the ‘host’ and displays the same on the monitor.

- A PC-based system, is one in which an isolated unit contains the load cell which measures the weight of the postal article. The output signal is amplified and transferred to a PC. Appropriate software is added on to the PC, so as to compute the tariff for a given weight and other particulars viz. – destination, type of service of the

postal article. An add-on PCB may be utilized to enhance the PC capabilities.

The basic difference between the above two systems is that in the RS232C system, the logic for processing data is in the host and this logic unit is designed in accordance with a software. On the other hand, the PC-based system utilizes the logic unit of the PC. BIL conducted a qualitative feasibility study, as shown below, to evaluate the two

alternative systems. Since the PC-based system was felt to be simpler, less costly and easier to mfr (with a potentially higher profit margin), this system was selected for implementation.

Parameter RS232C-based system PC-based system

Functional feasibility Satisfactory Satisfactory

Technical feasibilityDesign of electronic & mechanical

hardware is fairly complicatedSimpler design, less labour

reqd

Financial feasibilityGreater number of parts, costly

systemSimpler system, less costly

Economic feasibilityHigher risk, lower return on

investmentHigher return on investment &

profit margin (likely)

The Implementation Strategy : The Work Breakdown Structure (WBS) of this project, as done by BIL, comprised the following major items of work –- Mechanical design (and documentation).- Electronic design (and documentation).- Software specifications.- Vendor development (for standard and custom-made items).- Production (including fabrication, assembly and maintenance).- Quality control (and mgmt).

Project Scheduling and Crashing Table below shows the estimated duration of the various work packages in this project –

Code Activity descriptionEstimated

duration (days)

A Mechanical design 7

B Electronic design 6

C Software design 22

D Mechanical documentation 3

E Electronic documentation 2

F Vendor development 5

G Placement of order 3

H Procurement:standard items 3

I Procurement:PCB's 18

JProcurement:custom-made items

22

K Mechanical inspection 6

L Electronic inspection 4

M Materials issue 3

N Mechanical sub-assembly 7

O Electronic sub-assembly 9

P Unit assembly 8

Q Unit testing 11

R Trouble shooting 6

S Final testing 8

T Soaking 3

U Packing 4

V Dispatching 2

Code Activity descriptionEstimated

duration (days)

Software design and procurement of custom-made items are expected to take 22 days each; procurement of PCBs is scheduled in 18 days; whereas testing after unit assembly is programmed to last for 11 days. The durations of all other work packages are less than 10 days each.

The earliest expected times and the latest allowable times for all the events were calculated using forward and

backward passes through the network and the results are given in the following table -

Event

Earliest expected time

TE (days)

Latest allowable time, TL

(days)

Slack = TL - TE

(days)

1 0 0 0

2 7 7 0

3 6 8 2

4 10 10 0

5 15 15 0

6 18 18 0

7 36 38 2

8 21 38 17

9 40 40 0

10 40 40 0

11 36 38 2

12 44 44 0

13 47 47 0

14 54 56 2

16 56 56 0

17 64 64 0

18 75 75 0

19 81 81 0

20 90 90 0

21 93 93 0

22 97 97 0

23 99 99 0

Event

Earliest expected time

TE (days)

Latest allowable time, TL

(days)

Slack = TL - TE

(days)

Based on the identification of the zero-slack events, the critical path was identified by connecting the zero-slack events (ie. all events except events 3, 7, 8, 11 and 14). The PERT analysis was done by BIL before the commencement of the project and revealed that the earliest expected time for completing the project is 99 days. Since the co had contracted to comlete the project in 90 days, it wished to selectively crash some of the activities.

Table below reveals the normal and crash durations and costs for the work packages of the electronic postal meter project.

Work code

Package Description

Normal Crash

Duration (days)

Direct cost (Rs)

Duration

(days)

Direct cost (Rs)

Work code

Package Description

Normal Crash

Duration (days)

Direct cost (Rs)

Duration (days)

Direct cost (Rs)

AMechanical design

7 15,000 5 18,000

BElectronic design

6 18,750 5 25,500

C Software design 22 17,490 19 21,000

DMechanical documentation

3 6,000 2 10,500

EElectronic documentation

2 9,750 2 9,750

FVendor development

5 8,250 5 8,250

GPlacement of order

3 1,680 2 2,100

HProcurement:standard items

3 6,75,000 3 6,75,000

IProcurement:PCB's

18 1,98,000 16 2,06,700

JProcurement:custom-made items

22 7,50,000 22 7,50,000

LElectronic inspection

4 3,510 4 3,510

M Materials issue 3 1,650 3 1,650

NMechanical sub-assembly

7 18,000 5 26,250

OElectronic sub-assembly

9 18,000 8 24,000

P Unit assembly 8 18,000 7 21,750

Q Unit testing 11 3,600 9 5,400

R Trouble shooting 6 4,050 4 5,400

S Final testing 8 3,600 6 4,950

T Soaking 3 1,800 3 1,800

U Packing 4 2,580 3 3,180

V Dispatching 2 1,290 1 1,950

KMechanical inspection

6 5,850 6 5,850

The cost-time slopes for the ‘crashable’ activities were computed and selective crashing of the least cost-time slope activities on the critical path was undertaken. The result of this exercise is shown in following table. Since contracted schedule for BIL to complete the project was 90 days, the co adopted this schedule, at an earliest direct cost of about Rs. 17.89 lakh.

S.No. Duration of the project (days) Total direct cost (Rs)

1 99 17,81,850

2 97 17,83,110

3 94 17,86,530

4 87 17,94,780

5 86 18,00,780

Direct costs of various stages of selective crashing in the electronic postal meter project -

Problems in Project Implementation : The two major problems that arose in implementing the electronic postal meter project were –

1. Since BIL did not create a separate project organization, there were several

instances of conflict of priorities between the regular production activities of BIL and the work on the electronic postal meter project. This resulted in the co having to do a lot of ad hoc allocation of manpower

and frequent ‘fire fighting operations’. The net result was that the project could be completed after 120 days (delay of 30 days), at a cost of Rs 20.50 lakh (cost overrun of Rs 2.61 lakh).2. A formal budget was not prepared by BIL for the proposed project. Consequently, the cash flow reqmts were not projected and this resulted in severe cash flow problems on quite a few instances. This was also a contributing factor for the schedule and cost overruns in this project.

Concept of Market Appraisal : Market Appraisal is related with the amount a consumer pays to the seller. Both the consumer & the seller is familiar with relevant facts concerning the business and they cannot be forced to buy or sell. It is important to remember that a fair mkt appraisal is an opinion based on the individual appraiser’s knowledge & background. It reflects both the current mkt and geographic area of the product to be sold.

Generally mktg appraisal is done for those entrepreneurs who have already established their business. The need of business includes a wide range of services & several issues when planning which products or services should be launched for the customers. For trainers, mktg appraisal is a product to mkt to potential clients. It is relatively easy to train intermediary grps and orgns, as they are likely look for tools like mktg appraisal to help their clients develop

better business. The techniques for mktg appraisal include face-to-face mktg, method of mktg trng to non-literate people and other methods like advertising flyers, posters, announcements & incentives. Incentives could include special discounts for introductory products.

Market Appraisal for Projects : A good business idea is the one that meets the need of the customers and offers a product or a service that customers are willing to pay for. Any orgn should carefully invest on regularly providing new products and services to its customers. Introducing new products and services are beneficial for an orgn in the following ways :• Increases the expected earnings of an orgn.

• Improves the reputation of a business.• Generates sense of competition.• Attracts new customers.• Retains old customers by developing products and services as per the customers’ reqmts.• Includes new techniques & technologies in the products & services.

Considerable factors for Market Appraisal : For mkt appraisal following points need to be considered –Prior to introducing a product or service, an orgn should judge the profit earning capacity of the product or service. To check the feasibility of a product or a service, the orgn should extensively discuss the pros & cons of the product or service with customers, suppliers and people with a good knowledge about business operations. However, an orgn’s

focus should be on developing a product that is not currently available in the mkt and if the product exists focus should be on value added features (relating to custmomers needs).

Before introducing the product, it is necessary to list and consider all the positives & negatives. May be, an orgn lacks the eqpt to make a product or perhaps it is going to be difficult to produce it inexpensively. May be no one

in the area has ever heard of it and therefore, will not be interested in purchasing it until they try it. As these negative points are observed, the means to overcome them also need to be considered, like borrowing the eqpt from the neighbour and offering free samples of the product, to make people familiar with the development and existence of the new product. An orgn needs to overcome these negative points by taking them as a challenge.

During the mkt appraisal of the product, an orgn needs to ask potential customers and experts about their views over the product. They will help an orgn determine exactly how to make, sell and mkt the product and at what price. But first an orgn needs to analyse the product itself. An orgn needs to screen its product over the following issues –- Product existence in the mkt.- Technological updation of the product.- Product utility and user friendliness,

product qlty in comparison with the competitors.

After all these considerations, an orgn needs to think about the product in a little more depth. It should consider following -• Is there a mkt for this new idea ?• Can the customer needs be provided for ?• Can the idea be put across to the customer ?• Does the orgn have the materials & eqpts to make this product (or offer this service) ?

Importance of Customers : When an orgn conducts mkt appraisal, it talks to people who might be the potential customers of the product. Who exactly is a customer ?

Customers are the reason for any business. It needs to be remembered that without them an orgn cannot make money.•A customer is the most important person in an enterprise.

•A customer is not dependent on an orgn, instead it is the other way round.•A customer is not an interruption to the work; but is the purpose for it.•An orgn is not doing the customer a favour by serving him; but the customer is doing a favour by giving an orgn the opportunity to serve him.•Without the customer, there is no business.

An orgn should question its customers

over the following three areas. They include –

Need : Potential customers will mainly buy products that fulfil their needs or desires or that can solve a certain problem. An orgn should know why the customers would or would not buy the product. Perhaps the need the product meets is already being met by another product. An orgn should also find out what else the potential customers buys

and why.

Quality : The customers can tell the producers the ways to improve the product and what aspects of qlty and packaging they expect from the product. It is better if you have a sample of the product. If not, an orgn should try showing them a drawing and ask them how it could be improved or what they would look for before buying it.

Price : An orgn needs to know how much the customers are willing to pay for a product. Only then will an orgn be able to see if it can earn profit by making a product. It is best to offer a range of price and have the customers tell whether they would pay a given price.

Market Survey for Forecasting Future Demand and Sales : Mkt survey is a collection of data & information from a sample of customers and potential customers. The data and information are analysed and inferences made about the population at large. It is of two types – Census Survey and Sample Survey. Former covers the maxm units involved in a study. It is costly and infeasible. While in Sample Survey, a section of population is obsd for gathering relevant information.

The gathered details in the mkt survey provides following information –• Total demand and growth rate of demand.• Demand in different parts of the market.• Reason for purchasing.• Consumer satisfaction with the existing product.• Socio-economic features of consumers.

A sample survey includes the following steps –- Defining the target population :

- Selecting the sampling scheme and sample size :- Developing questionnaire :- Recruiting & trng the field investigators :- Obtaining information as per the questionnaire from the respondents :- Scrutinising the gathered information :- Analysing & interpreting the information :Following points can make the mkt survey ineffective –- Vagueness and inadequacies in the questions.

- Deceiving by the investigators.- Lack of understanding of the question on the part of the respondents.- Improper data scrutiny method.- Incorrect and inappropriate analysis and interpretation of data.

Characteristics of the Market : After gathering information from the survey the characteristics of the product mkt can be described with the help of following points –Demand of the product in the past and present : In a competitive mkt effective demand is equal to the Consumption. Price : Price statistics with qty should be gathered in order to distinguish following prices –- Mfgr’s price quoted as FOB

- Domestic price for imported goods - Average wholesale price- Average retail price

Falling demand : Mkt is influenced by different segments of the product user. Mkt segment depends on the nature of product, consumer grps and geographical division. Consumers of a product can be classified as industrial, domestic. These consumers can further be subdivided as industry-wise and income-wise.

Analysis : For all segments analysis is reqd because nature of demand varies from segment to segment.

Distribution methods & sales promotion : Depends on the nature of the poduct . . .

Consumers : Consumer characteristics can be determined on the basis of - Demographic & sociological and Attitudal

Demographic & sociological Attitudal

Age Preference

Income Intentions

Sex Habits

Profession Attitudes

Social Background Responses

Types of Consumer

Supply & competition : It is important to know sources of supply (imported or domestic etc.)

Govt Policy : Import & export trade controls, Import duties, Export incentives, Excise duties, Sales-tax, Industrial licensing, Credit controls and Financial regulations.

Demand Forecasting : Demand forecasting is done after gathering information about various characteristics of the market and demand from various sources. Several forecasting methods are available for the mkt analysts, as below –

Qualitative Method : Executive Opinion Method and Delphi Method (Basically a more formal version of Executive opinion).

Time Series Method (Quantitative) : Trend Projection Method and Moving Average Method

Casual Methods : Chain Ratio Method, Consumption Method and End Use Method.