Investment Appraisal in Business Case

Money

“Investment Appraisal” is the last building element of the Business Case. The “Evaluation” section represents the transition phase between the presentation and the acceptance (or refusal) of the project.

Due to its “financial” matter, the project manager should be looking for collaboration with the Financial Department.

Which is the scope of “Investment Appraisal” section?

Presenting the financial viability of the project.

Whether the project’s  “Reasons” are purely commercial (i.e. selling a product/service) or imposed by external factors (e.g. new legislation, merging companies etc.); it is necessary to evaluate the impact of costs against the potential benefits received (transformed in money).

From the Risk Management viewpoint, there are two essential topics:

1. Receiving the necessary amount of money through the correct “Cash Flow” analysis.
2. Granting a credible results that pay back all efforts. This could be used for buy-in the necessary support from Senior Management.

NPV (Net Present Value)

The key principle is focused on the comparison between the estimated total income produced from the realization of project’s benefits and the yielding of the project’s costs invested in another investment. The comparison is based on each option magnitude (how much money is yielded at the end of the analyzed period).

The element used for standardizing different investments (e.g. “Options” within a project, or concurrent projects), is the “Required rate of return” .

In the following section are presented (and briefly explained) the most common techniques using Excel (sources Wikipedia + Excel HelpOnLine):

These are the factors:

The concept of this formula is focused on the discounting back the project’s benefits yielding, when future costs are included.

IRR (Internal Rate of Return)

This financial tool cannot be used for comparing two different options/projects. It serves for calculating the efficiency of an investment.

This site offers a good explanation and useful tools .

Expected Monetary Value

It is another tool that uses the information produced by NPV. In this case, the projects’ values (it could be split into phase – work-packages) are updated with their risk factors.

This will create a decision tree that will be solved using the Baeysian formulae (more to come in the next posts).

Conclusion

The scope of this post is limited to introduction of operational concepts that could help a Project Manager in the understanding the financial aspects of key decisions.

Quite often, the big issue is about the availability of correct information. This can be solved only improving the Stakeholders’ management techniques.

“For tomorrow belongs to the people who prepare for it today”

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