Chapter 5 - Project evaluation: Principles and methods. This chapter explain the importance of each of the steps in the capital expenditure process, outline the decision rules for each of the main methods of project evaluation, explain the advantages and disadvantages of the main project evaluation methods,. | Chapter 5 Project Evaluation: Principles and Methods 1 1 1 1 1 1 1 1 1 1 Learning Objectives Explain the importance of each of the steps in the capital expenditure process. Outline the decision rules for each of the main methods of project evaluation. Explain the advantages and disadvantages of the main project evaluation methods. 2 2 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Explain why the net present value method is preferred to all other methods. Understand the link between economic value added (EVA) and net present value (NPV). 2 2 2 2 2 2 2 2 2 2 Capital Expenditure Process The capital expenditure process involves: Generation of investment proposals. Evaluation and selection of those proposals. Approval and control of capital expenditures. Post-completion audit of investment projects. 3 4 4 5 5 5 5 5 5 4 Generation of Investment Proposals Investment ideas can range from simple upgrades of equipment, replacing inefficient exiting equipment, through to plant expansions, . | Chapter 5 Project Evaluation: Principles and Methods 1 1 1 1 1 1 1 1 1 1 Learning Objectives Explain the importance of each of the steps in the capital expenditure process. Outline the decision rules for each of the main methods of project evaluation. Explain the advantages and disadvantages of the main project evaluation methods. 2 2 2 2 2 2 2 2 2 2 Learning Objectives (cont.) Explain why the net present value method is preferred to all other methods. Understand the link between economic value added (EVA) and net present value (NPV). 2 2 2 2 2 2 2 2 2 2 Capital Expenditure Process The capital expenditure process involves: Generation of investment proposals. Evaluation and selection of those proposals. Approval and control of capital expenditures. Post-completion audit of investment projects. 3 4 4 5 5 5 5 5 5 4 Generation of Investment Proposals Investment ideas can range from simple upgrades of equipment, replacing inefficient exiting equipment, through to plant expansions, new product development or corporate takeovers. Generation of good ideas for capital expenditure is better facilitated if a systematic means of searching for and developing them exists. This may be assisted by financial incentives and bonuses for those who propose successful projects. 4 5 5 6 6 6 6 6 6 5 Evaluation and Selection of Investment Proposals To enable evaluation of a proposal, it should include the following data: Brief description of the proposal. Statement as to why it is desirable or necessary. Estimate of the amount and timing of the cash outlays. Estimate of the amount and timing of the cash inflows. Estimate of when the proposal will come into operation. Estimate of the proposal’s economic life. 5 6 6 7 7 7 7 7 7 6 Approval and Control of Capital Expenditures Capital expenditure budget (CEB) — maps out the estimated future capital expenditure on new and continuing projects. CEB has the important role of setting administrative procedures to implement the project .
