The major aspects of project preparation and analysis are outlined bellow:
Technical Aspects
This aspect may include the works of engineers, soil scientists and agronomists in case of, say, agricultural projects.
The technical analysis is concerned with the projects inputs (supplies) and outputs of real goods and services and the
technology of production and processing. It is analysis of the technical and engineering aspects of a project to be done
continuously when a project is formulated. Technical analysis seeks to determine whether the prerequisites for the
successful commissioning of the project have been considered and reasonably good choices have been made with
respect to location, size, process, etc. It is from this aspect analysis that all physical quantity of inputs and outputs will
be determined for the estimation of costs and benefits.
Poor technical analysis will result in under- or over- estimation of quantities related to inputs required by and outputs
of the project. Further analysis based on these estimates would eventually lead to spurious cost and benefit estimates.
Care must also be taken in assessing alternative designs and techniques. The project’s expected life time must also be
determined carefully for it has greater implication on its overall analysis and preparation. All these require creative,
committed and competent specialists from different fields. It also requires coordination among these specialists, as
every technical aspect is interrelated and interacting.
In general, the technical analysis is primarily concerned with
 Material inputs and utilities
 Manufacturing process and technology
 Product mix
 Plant capacity
 Location and site
 Machines and equipment
 Structure and civil works
 Project charts and layouts
 Work schedule
Commercial /Demand and Market/ Aspects
This aspect analysis needs to ensure the existence of effective demand at remunerative price. It also assesses possible
means in which the market will absorb the output without affecting the output price and if it prices inevitably be
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affected, we would have to assess its magnitude. Similar arrangements need to be done on the input side too
(including procurement of equipment and intermediate input supplies).
Market analysis is basically concerned with two questions:
1. What would be the aggregate demand of the proposed product/service in future?
2. What would be the market share of the project under appraisal?
To answer the above two questions, the project analyst requires a wide variety of information and need to use
appropriate forecasting methods. The kinds of information required are:
1. Consumption trends in the past and the present consumption level
2. Past and present supply positions
3. Production possibilities and constraints
4. Imports and exports
5. Structure and competition
6. Cost structure
7. Elasticity of demand
8. Consumer behavior, intentions, attitudes, preferences, and requirements
9. Distribution channels and marketing policies in use
10. Administrative, technical, and legal constraints.
All aspects related to demand and supply of inputs and outputs must be examined.

Institutional-Organizational-Managerial Aspects
Project analysis must make a detail analysis of project organization and management. This analysis aims at answering
the following questions:
 Is the organizational set-up of the project adequate?
 Will the project be provided with competent personnel to manage it?
The first question is about the proposed organization chart of the implementing agency. The latter question aims at
ensuring that adequate project staff can be recruited locally or overseas. The problem of project staffing raises many
other questions:
 Is local manpower market enough to provide the project with the required manpower?
 Can competent staff be recruited freely?
 Should they be recruited locally or overseas?
But even if the right staff is available, their success will depend mostly on the institutional set-up i.e., the relationship
between the various organizations involved with the implementing agency. Appraising organization therefore includes
appraisal of the project related institutions like subsidiary companies, ministries, headquarters, banks, transport
companies and others.
 What are the regulations or procedures?
 What are the policies – that favor and disfavor the project?
Once the right institutions to facilitate project implementation are available, the project should be implemented by
competent, responsible and committed managers. This requires arrangement of adequate incentives to attract
competent managers. Managerial appointment should be a function of competence and commitment, not a function of
race, tribe, creed or political opinion.

Financial Aspects
Financial analysis seeks to ascertain whether the proposed project will be financially viable in the sense of being able
to meet the burden of servicing debt and whether the proposed project will satisfy the return expectations of those
who provide the equity capital. Here the project analyst is concerned with the financial effects of the proposed project
on each of its various participants (firms, farmers/workers, government etc.). By examining the financial implications
of the project for these parties, the analysts need to identify the projects financial efficiency, incentive impact to the
participants in the project, creditworthiness and liquidity (say, could the firm have enough working capital?).

The financial analysis establishes the magnitude of costs of investment, production and overheads and magnitude of
benefits. This analysis will be the basis for evaluating the project profitability. Project profitability depends on a
comparison of costs versus revenues using realistic market prices of materials, labor and outputs.
The aspects, which have to be looked into while conducting financial appraisal, are:
1. Investment outlay and costs of the project
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2. Means of financing; source of finance, credit terms, interest rates, etc
3. Cost of capital
4. Projected profitability
5. Break-even point
6. Cash flows of the project
7. Investment worthiness judged in terms of various criteria of merit
8. Projected financial position
9. Level of financial risk
Financial analysis must generate future financial statements such as income statement, balance sheet and uses-andsource-of-fund
statement.
After
these
statements
are
produced,
analysts
can
undertake
different
financial
ratio
analysis

so

as to ascertain financial feasibility. The financial analysis must clearly show fund flows in each period in the
project life.

Economic Aspects
The economic aspect of project preparation is primarily concerned with the determination of the likelihood of the
proposed project, and hence the committing of scares resources, by justifying the significance of the project from the
whole economy point of view (the society as a whole). In such evaluation the focus is on the social costs and benefits
of a project, which may often be different from its monetary or financial costs, and benefits. The financial analysis
views the project form the participants (or owners) point of view, while the economic analysis forms the society’s
point of view.
Decision makers here are concerned about the investment of scarce capital and other resources that will best further
national objectives. This is true whether the resources committed are being invested by government directly or by
individuals within the economy.

While financial analysis uses projected market prices to value inputs and outputs, economic analysis uses ‘economic
prices’ or ‘shadow prices’ or ‘efficiency prices’ to better approximate the opportunity costs of an input – the amount
the economy must give up if the resource is transferred from its present use to the project. Similarly, to value project’s
output, economic analysis uses the marginal value of a given output to approximate the real value – the value that
consumers place on that commodity. Thus economic analysis requires adjustment of market prices, which may not
reflect the real value of resources and outputs, into economic prices. It also requires determination of economic prices
of those goods that might not have market prices but that involve commitment of real resources. The mechanics of
adjusting market prices into economic prices will be discussed in detail in the later chapter.
Social Aspects
Project analysts are also expected to examine the broader social implications of the proposed project. Although the
economic analysis will determine the amount of income stream generated over and above the costs of labor and other
inputs, it does not specify who actually receive it and hence it does not the issue of income distribution. So the social
aspect analysis should address the income distribution implications of a project. Other closely related aspects as
employment opportunities, gender aspects, stimulating or competing effects with other sectors, and other desired
objectives must be considered.
Environmental aspect analysis
In recent years, environmental concerns have assumed a great deal of significance. In most developed countries and
for projects financed by foreign donors in developing countries, an environmental impact assessment is a prerequisite
for project financing. Environmental impact of a project refers to the effect of a project on the world of animals,
plants, water, air, and humans existing in the project area. Ecological analysis should be done particularly for major
projects, which have significant ecological implications like power plants and irrigation schemes, and environmental
polluting industries. In such projects environmental impact assessment is important because economic benefits that
may be generated from the project can be counter-balanced by undesirable environmental effects. The key questions
raised in ecological analysis are:
 What is the likely damage caused by the project to the environment?
 What is the cost of restoration measures required to ensure that the damage to the environment is contained
within acceptable limits?