Project appraisal - an integrated approach
Set required rate, criteria and appraisal measures
All involved in the process must know the criteria to be adopted.
Screen proposals from a business objectives point of view
There is a tendency today to turn to the spreadsheet as the fount of all knowledge. If there are many proposals, before carrying out or asking for the screening appraisals it may make sense for a panel to review proposals from a business point of view; for example, does the proposal really meet or fit in with current corporate objectives or other strategies? An obvious example would be purchasing new equipment when the principal corporate strategy is to conserve cash for the foreseeable future.
Care should be taken not to dismiss ideas out of hand, as there may be something in them for the future. For some 'new technology' companies it may be that the company should sponsor an independent subsidiary to develop the proposal and protect intellectual property.
Apart from not wasting time on spreadsheet and number exercises to screen projects, an unintentional rigid belief in the truth of the spreadsheet can divert thinking about whether an investment makes business sense and is truly likely to be viable.
Ask for screening appraisals
Whether a large one-off project or where there are many small projects to choose from, it often makes sense to carry out an overview appraisal, also carrying out some sensitivity analysis with the objective of identifying if and by what margin the project may be viable.
Ask for detailed appraisals
These will be carried out by those requesting funds or by a central team. A key issue is that however it is carried out, the cash flow data collection, preparation, DCF calculations, use of measures and sensitivity analysis are carried out consistently.
Have a clear and fair review process
Whether at board level or, even more valuable, at small project level, formal presentations by the requestor of funds, with open questioning on the business, technical and ultimately financial viability, are invaluable.
Carry out a post-investment review - audit
The purpose is to improve the appraisal process. The aim is to identify if there are indications of systematic weaknesses endemic in the company's process.