The investment program for the sector, the strengths and weaknesses of public and private sectorial institutions, and key government policies are all examined. The project is subjected to a detailed cost-benefit analysis of alternative project designs, the result of which is usually expressed as an economic rate of return and the one that contributes most to the development objectives of the country may be selected. The distribution of the benefits of a project and its fiscal impact are considered carefully. Since the estimates of future costs and benefits are subject to substantial margins of error, a sensitivity analysis is always made of the return on the project to variations in some of the key assumptions. Moreover, macro- economic benefits such as value added, effect on employment, generation of foreign exchange etc., are also considered.
Financial appraisal has several purposes.
One is to ensure that there are sufficient funds to cover the costs of implementing the project. Thus project appraisal ensures IDB to a financing plan that will make funds available to implement the project on schedule. The financial appraisal is also concerned with financial viability. The finances of the enterprise are closely reviewed through projections of the balance sheet, income statement, and cash flow. The financial review often highlights the need to adjust the level and structure of prices charged by the enterprise.