--- title: "Importance of appraisal; economic vs financial" subject: "Project Engineering" chapter: 2 key: "semester_7/project_engineering:appraisal-importance-economic-financial" source: https://www.bctengineer.com/q/semester_7/project_engineering/appraisal-importance-economic-financial site: BCT Engineering --- # Importance of appraisal; economic vs financial Project Engineering · Chapter 2: Project Appraisal and Project Formulation - Asked in: 2074 Asoj, 2+4 marks - Video: [Comparison of Financial and Economic Analysis in Project Appraisal](https://www.youtube.com/watch?v=ZpPxFmkeGCo) — Dr Bilal Mehmood - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_7/project_engineering/appraisal-importance-economic-financial - Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-2 ## Question Describe the importance of project appraisal. Explain the difference between Economic Appraisal and Financial Appraisal. ## 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. ## Answer #### 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 | Basis | Economic appraisal | Financial appraisal | |---|---|---| | Viewpoint | Nation or society | Project owner or investor | | Prices | Shadow (economic) prices | Market prices | | Costs and benefits | All, including external effects | Only cash costs and revenue | | Taxes and subsidies | Transfer payments, excluded | Included | | Discount rate | Social discount rate | Cost of capital | | Indicators | EIRR, economic NPV, B/C | FIRR, NPV, payback, DSCR | | Question | Is it good for the country? | Is it profitable and fundable? | | Example | Road: time saved, accident reduction | Toll road: toll revenue vs cost | ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. What decision does appraisal support? A. How to speed up construction B. Whether to accept, modify or reject the project C. Which drawings to print D. Which contractor to pay first Answer: B. Appraisal gives a go or no-go recommendation. (Key point: Importance: go or no-go) 2. Why is appraisal often required by lenders and donors? A. It guarantees the project will make a profit B. It lets them avoid risk analysis C. It replaces the loan agreement D. It gives them confidence and is usually a condition of financing Answer: D. A satisfactory appraisal is normally a condition for financing. (Key point: Lender confidence) 3. From whose viewpoint is economic appraisal done, compared with financial appraisal? A. Economic: the nation or society; financial: the project owner or investor B. Both: the lender only C. Economic: the contractor; financial: the consultant D. Economic: the investor; financial: the nation Answer: A. Economic appraisal asks if it is good for the country; financial asks if it is profitable and fundable. (Key point: Viewpoint difference) 4. Which statement about prices and taxes is correct? A. Economic appraisal uses shadow prices and treats taxes and subsidies as transfer payments; financial uses market prices and includes them B. Both use shadow prices and exclude taxes C. Economic appraisal uses market prices and includes taxes; financial uses shadow prices D. Both use market prices and include taxes Answer: A. Taxes and subsidies are transfers in economic terms but real cash flows for the owner. 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