Project Appraisal
4-1
,Learning Objectives
At the end of this session you should be able to:
▪ Explain and be able to calculate the relevant cash flows for
an investment project
▪ Appraise projects using different appraisal techniques
▪ Critically evaluate the theoretical and practical use of each
technique
▪ Understand terms such as capital rationing, mutually
exclusive and divisibility
▪ Evaluate the optimal investment decision for multiple projects
under a variety of different circumstances
4-2
,What is Project Appraisal?
▪ Project appraisal can also be called:
• Investment appraisal or capital budgeting
▪ Projects involve making capital outlays in the hope
of adding extra “value” in the future
• Poor decisions can ultimately lead to bankruptcy
▪ Examples of project/capital investment decisions;
• Launch new products or enter new markets
• Purchase new assets e.g. plant and machinery
• Upgrade company IT
• Hiring of new staff
• R n D projects
4-3
, Two Stages
❑There are two stages to project appraisal
❑Stage One
▪ Estimation of future cash flows from the project
• How much does it initially cost?
• How long will it last?
• What do you get back?
❑Stage Two
▪ Analyse the cash flows
▪ Given the cash flows, is project worth doing? 4-4
4-1
,Learning Objectives
At the end of this session you should be able to:
▪ Explain and be able to calculate the relevant cash flows for
an investment project
▪ Appraise projects using different appraisal techniques
▪ Critically evaluate the theoretical and practical use of each
technique
▪ Understand terms such as capital rationing, mutually
exclusive and divisibility
▪ Evaluate the optimal investment decision for multiple projects
under a variety of different circumstances
4-2
,What is Project Appraisal?
▪ Project appraisal can also be called:
• Investment appraisal or capital budgeting
▪ Projects involve making capital outlays in the hope
of adding extra “value” in the future
• Poor decisions can ultimately lead to bankruptcy
▪ Examples of project/capital investment decisions;
• Launch new products or enter new markets
• Purchase new assets e.g. plant and machinery
• Upgrade company IT
• Hiring of new staff
• R n D projects
4-3
, Two Stages
❑There are two stages to project appraisal
❑Stage One
▪ Estimation of future cash flows from the project
• How much does it initially cost?
• How long will it last?
• What do you get back?
❑Stage Two
▪ Analyse the cash flows
▪ Given the cash flows, is project worth doing? 4-4
