Short Questions Project Appraisal

Short Questions

1. Cash flow refers to the movement of money into and out of a business, project, or individual account over a specific period. For example, Revenue from sales of goods or services, loan repayments, interest payments, etc.
2. Cash inflow is the amount of money coming into the business from various sources during a specific period. For example, revenue from sales of goods or services, interest earned on investments etc.
3. Cash outflow is the amount of money going out of the business during a specific period. For example, payments for salaries, rent, or utilities. purchase of raw materials, loan repayments or interest payments, taxes or dividends paid etc.
4. Contingency allowance is an amount of money included in a budget to cover unforeseen expenses or potential risks that may arise during a project. Thus, contingency allowance is used to manage uncertainties and unexpected costs.
5. Depreciation refers to the decrease in the value of a financial asset such as stock, real estate or currency over time.
6. Discount rate (i) is the rate that is used to convert future value into present value. It is also called capitalization rate. It reflects the time value of money which is the idea that money today is worth more than money in the future.
7. Economic analysis of a project is carried out from the perspective of the entire economy, and it assesses overall impact of a project on the welfare of all the citizens of the country. It also includes external effects of projects such as environmental and health impacts.
8. Ex-post evaluation refers to the assessment of a project after its completion. It examines the project effectiveness or its impact on target population or entire economy. It can be done by estimating cost-benefit analysis or cost effectiveness analysis.
9. Feasibility study is a preliminary analysis to determine if a proposed project or business idea is practical and likely to succeed by assessing its technical, economic, legal, managerial, and scheduling viability.
10. Financial analysis estimates the profitability of a project, from an investor’s perspective. It compares the costs of the project to the expected revenue over the project lifespan for that particular firm only. It does not consider external effects.
11. Future value (FV) is the value of some present amount of money in the future time period. It is calculated as: where i is the discount rate and n is the time period.
12. Interest rate (r) is the percentage of money which is paid on loans or earned on savings often expressed as the percentage of principal amount. It is the opportunity cost of money. It is used to express TVM.
13. Mutually exclusive projects are those projects where the acceptance of one project automatically means the rejection of the other(s). For example, choosing between building a road or a railway line on the same route.
14. Net cash flow is the difference between cash inflows and cash outflows. Positive net cash flow occurs when a business or individual has more cash coming in than going out. Negative net cash flow occurs when a business or individual has more cash going out than coming in.
15. Net present value (NPV) is the difference between present value of all future cash inflows and initial cash outflow (). NPV uses discount rate (r) to convert future value into the present value:. If NPV > 0, accept the project.
16. Nominal interest rate (i) is the rate of interest that banks pay on savings or charge on loans, without adjusting for inflation. It is equal to the sum of real interest rate and inflation rate. 𝑖=𝑟+𝜋.
17. Opportunity cost is the value of the next best alternative forgone when a choice is made. It includes not just money, but also time, resources, or benefits forgone. For example, the opportunity cost of pursuing education is the forgone income by participating in the labor market.
18. Present value (PV) is the current value of some future amount of money. The higher the rate of interest, the smaller the present value of a future amount of money. It is calculated as follows:
19. Private benefits are the internal gains or advantages that directly accrue to the individuals, firms, or organizations undertaking a project. Example:e A company builds a factory to produce furniture. The profit earned is private benefit.
20. Private costs are the internal expenses or costs directly borne by the project owner or firm in carrying out the project. For example, costs of raw materials, labor, and machinery are private costs etc.
21. Program vs Project: A program is a group of related projects in a similar area aimed at achieving a broader goal. A project is a temporary effort with specific objectives and deliverables. Example: Infrastructure development for an entire city is a program and construction of a single bridge is a project.
22. Project is an investment activity upon which resources are expended to create capital assets that will produce benefits over an extended period of time. It is unique and temporary in nature with a defined beginning and end with specific objectives.
23. Real interest rate (r) is the rate of interest adjusted for inflation. It represents the increase in purchasing power. It can be found by the difference between nominal interest rate and inflation rate. 𝑟=𝑖−𝜋.
24. Social benefits are overall benefits of a project to society, including both private benefits gained by individuals or organizations directly involved in an activity and the external benefits gained by the third parties not directly involved in an activity.
25. Social Costs are total costs borne by whole society including private costs borne by individuals or oganizations directly involved in an activity and external costs borne by the third parties not directly involved in an activity.
26. Social rate of return is a measure of the overall benefit to society from an investment or project. It includes both private benefits and external benefits, considering the positive and negative externalities such as environmental effects, job creation, improved public infrastructure etc.
27. Sunk cost is a cost that has already been incurred and cannot be recovered. These costs are “sunk” because they are past expenses that should not influence current or future business decisions. For example, research and development expenses, advertising expenses, training costs etc.
28. Time value of money (TVM) is a concept that money today is worth more than the same amount of money in the future due to its earning potential. It is used to convert the future value into present value by using some discount rate.