Skip to main content

Importance of appraisal; economic vs financial

Short answer

Appraisal helps decide whether to accept or reject a project, avoids wasting capital, ranks alternatives, finds risks early, and gives lenders confidence. Economic appraisal uses shadow prices and includes externalities to judge national benefit; financial appraisal uses market prices and cash flows to judge investor profitability.

Describe the importance of project appraisal. Explain the difference between Economic Appraisal and Financial Appraisal.

Importance of project appraisal

  • Helps decide whether to accept, modify or reject a project (go or no-go).
  • Avoids wasting scarce capital on unviable projects.
  • Compares alternatives and ranks projects for limited funds.
  • Finds risks and weaknesses early, when changes are cheap.
  • Checks that technical design, cost and schedule are realistic.
  • Ensures economic benefit to the nation and acceptable environmental and social effects.
  • Gives lenders and donors confidence; usually a condition for financing.
  • Provides a baseline for later monitoring and evaluation.

Economic vs financial appraisal

BasisEconomic appraisalFinancial appraisal
ViewpointNation or societyProject owner or investor
PricesShadow (economic) pricesMarket prices
Costs and benefitsAll, including external effectsOnly cash costs and revenue
Taxes and subsidiesTransfer payments, excludedIncluded
Discount rateSocial discount rateCost of capital
IndicatorsEIRR, economic NPV, B/CFIRR, NPV, payback, DSCR
QuestionIs it good for the country?Is it profitable and fundable?
ExampleRoad: time saved, accident reductionToll road: toll revenue vs cost

✓ Answer checked by Claude Opus 5.5 (high effort)

Related questions

All Project Engineering chapter 2 questions →