Evaluation of Capital Projects

A guide to the evaluation of capital investment proposals and the creation of capital budgets. This e-book covers all aspects of Capital Investment Project valuation. After preliminary discussion of the present value of money, the Discounted Cash Flow analysis technique is described in detail, including establishing the operating period, determining evaluation parameters, identification of real cash flow items, determination of residual (salvage) value, sequencing of cash flows, application of inflationary indices, calculation of tax effects and discounting for inflation and interest, thus generating the Net Present Value (NPV).

Following this optimisation of individual projects and portfolios and management of common and diverse risk is discussed. The problem of interdependence of projects is discussed.

Next, some of the problems of dealing with uncertainty are addressed, including difficulties of estimation, bias in estimates and improvement of the quality of estimates.

Next, some of the broader issues of budget management are covered, including scenario planning, Monte Carlo Simulation and budget management under constrained availability of capital and resources.

Finally, some of the recognised problem areas in Capital Project Evaluation and Discounted cash flow methods are addressed, including the difficulty of determining the cost of equity, long-tail investments and large & 'strategic' projects.