Practical Techniques for Effective Project Investment Appraisal

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Project is possibly an overused word today, but it can cover situations from simple expenditure on capital asset to expenditure on a complete business venture - a project! Such expenditure could include the purchase of tangible fixed assets, as well as the funding of initial working capital required to get the project underway. The text contains many examples of appraisal process and spreadsheets. Hopefully some of these, though simple teaching examples, may appeal to the reader as being of practical use in their businesses. It is very likely that appraisals will be carried out by readers in many different currencies. To aid clarity no currency units have been used.

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Ralph Tiffin is a chartered accountant and has also practised as a mechanical engineer. Ralph runs his own accountancy practice, which has a wide range of successful businesses as clients. He is an expert in the area of project and capital expenditure appraisal and consultant to a range of international businesses, from power and telecom utilities to oil companies, food and paper manufacturing companies and banks. Table Of Contents Introduction Review of Basics Non discounted methods Discounting cash flows - arithmetic of appraisal Discounted cash flow measures Review of preparation of cash flow forecasts Rates/Inflation/Taxation and other Issues What is meant by 'rate?? Calculating weighted average cost of capital (WACC) The effect of high interest or discount rates How to deal with inflation Accounting for taxation Dealing with the costs of overheads Inclusion of spurious costs Including or omitting sunk costs Opportunity costs Cost of assets with infinite lives Grants Other Measures Commonly used measures Misunderstanding of NPV Other measures Present cost Annual worth Future worth Profitability index - benefit/cost ratio Cost-benefit analysis Appraising entire projects and businesses ? discounting cash flows as measures of performance Life cycle costing Risk Management through sensitivity analysis Introduction - risk management The need for the most likely case No need for provisions or contingencies 'One at a time? approach What is meant by 'sensitive?? Sensitivity due to inflation or deflation Analysis of price and volume changes Why carry out sensitivity analyses? Identify the risky parameters and tie them down Need for Consistency in Methods and Measures Investment and project appraisal review process Project appraisal -a more thorough, integrated approach Examples from practice are the best guide Investment/project appraisal process audit Need for appraisal process guidelines (or instructions) Example - RST plc Definition of rates where more than one hurdle rate is considered appropriate Accounting for Intangible Benefits Introduction - what are intangible benefits (or costs)? Defining/measuring intangible benefits Valuing benefits - valuation methods Some fundamental issues The criterion of human welfare Valuation methods Sources of data Choosing a method of valuation Consideration of other intangible benefits or costs Summary - the need for a process Refinery- cost-benefit analysis Lenders? Views of Projects and Other Issues Understanding lenders? criteria Project appraisal from the lender?s perspective Project finance PFI accounting requirements Accounting for probabilities If probabilities of cash flows are to be considered then expertise is required Appraisal process used to assist with negotiating Impairment reviews - valuation of intangibles.