All organizations with financial concerns perform economic appraisals at some point. Simply stated, an economic appraisal is a method by which a professional can analyze the potential benefits and risks of a project or policy in order to determine whether it is worth pursuing or dropping. An appraisal also can help a professional to determine whether a project is well planned and funded or if it needs to be optimized with a new strategy. Some key factors that often are included in an economic appraisal are the cost of a project, the revenues or gains a project can generate, and risks that are associated with a project.
Some experts believe that there are three different kinds of economic appraisal: cost-benefit analysis, cost-effectiveness analysis, and scoring and weighting. Cost benefit refers to comparing economic benefits of projects with cost of projects to determine which projects are most desirable. Cost-effectiveness, on the other hand, compares a project's benefits that do not have financial value, such as health, with cost of a project. Health care industries often use cost-effectiveness analysis.
When professionals practice the scoring and weighting method of economic appraisal, they create a list of potential project options. For each listing, they provide a score for each factor that does not have monetary value. Scores are based on effectiveness and benefits associated with each factor. Total scores are calculated at the end of the process, allowing professionals to see which project is most beneficial.
When managers and executives perform appraisals in the business world, they often hire consultants or valuation experts. These professionals may have backgrounds in accounting or financial management and are able to provide objective analysis and advice regarding the status of a project. Consultants might work closely with project managers to discuss goals and concerns.
Many experts believe that an economic appraisal should be a part of any managerial process in which a new system or project is introduced. In any industry, a number of variables come into play when it comes to performing economic outlooks. Market trends and competitor behaviors can greatly influence decisions made by managers. An effective economic appraisal should present a manager with a number of fresh perspectives based on accurate data that can allow him or her to rethink strategies.
Governments also use economic appraisals to determine the effectiveness of policies and plans. For example, a city government that is considering building a new road can consider the cost of construction versus the benefits of a new road. In general, an economic appraisal for a government agency aims to develop projects that can benefit the public while requiring a realistic budget.