Purposes of Investment Project Appraisal

Why should investment projects be appraised?

• Why do we need to appraise investment projects? However carefully a project is prepared and analysed, it still reflects the subjectivity of its analysts and preparers, and shortcomings and distortions are inevitable. To establish with greater certainty the reasonableness, efficiency and feasibility of the project, and to decide whether to invest in it, the project must be reviewed and examined independently of its preparation – in other words, it must be appraised. Project appraisal helps investors overcome the subjectivity of the preparers and identify and remedy shortcomings in each part of the project analysis. Project appraisal is part of investment management and provides a solid basis for effective investment.

• Projects play a very important role for investors and managers and directly affect socio-economic development. Without projects, an economy would find it hard to seize development opportunities; humanity’s great works of the century are proof of their importance. A project is an important basis for deciding to invest capital, preparing investment plans and monitoring implementation. It is the basis on which financial institutions make financing decisions and on which State authorities approve and grant investment licences. A project is also an important tool for managing capital, materials and labour during implementation. Understanding the characteristics of a project is therefore one of the decisive factors for its success.

• Investment project appraisal is part of management and aims to ensure that investment is effective. 

Purposes of investment project appraisal:

• To assess the reasonableness of the project, as reflected in the efficiency and feasibility of each component and of the project’s calculations 
• To assess the efficiency of the project from both financial and socio-economic perspectives 
• To assess the feasibility of the project: this is an extremely important purpose. Feasibility is demonstrated by reviewing the implementation plans and the legal environment.

Significance of investment project appraisal:

A project will succeed if its characteristics are correctly recognised and assessed by the project managers. That is why investment project appraisal is so significant for businesses: