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The need for a consistent and robust process

The selection of an appraisal process that delivers ideally risk-free investments and the required returns depends very much on a company's management culture, which itself may be affected by the nature of the business carried out.

A capital-intensive business, such as an oil major, will have the need for continuing larger and smaller amounts of investment, for new facilities and refurbishment and efficiency gains in existing operating plants. Central control is needed for the allocation of funds but also over consultation, with the aim of making the correct and technical decisions consistently.

This could be compared with a restaurant chain with many outlets, which would require tight central control over investment in the outlets. There would be a need for thorough consistency, with probably minimal consultation with unit operators, though hopefully the operators' views on the practicalities of the investment would be sought. It is also the case that the time horizons for returns would be much shorter and the exercise of adjusting for the time value of money may not be relevant; however, the need for well-researched cash flows, particularly sales, would be essential.

These two examples should illustrate the fact that there are issues of delegation to be addressed - how much does the board wish managers to become involved in decision making?

Further, the extent of the appraisal process and in particular the appraisal reviews will depend on the size and frequency of investment, size being relative to the annual or recurring expenditure of the business concerned. Thus small projects could be easily reviewed in, say, five minutes by a panel of managers. Large projects may require several stages of review, ultimately being reviewed by the board.

 
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