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Capital project appraisal (Overview of process (2.) Risk identification,…
Capital project appraisal
Overview of process
1.) Definition of project and scope
initial appraisal (SPURS)
2.) Risk identification, analysis and mitigation
risk identification tools (DR RUB)
causes of risk (PNEFCPB)
risk mitigation technique s (FAT SIR)
evaluation of risk mitigation options (OFFER)
3.) Choice of suitable risk discount rate
reflect systematic risk of project
normal degree of risk- WACC starting point (weights reflect optimal structure of company)
higher degree of risk - higher than normal discount rate
consider rates used by others engaging in similar projects
arbitrary adjustment
4.) Evaluation of cashflows (incl sensitivity testing)
5.) investment submission
contents (FIRM PEN)
capital project
A project where there is initial expenditure, and then, once the project comes into operation, a stream of revenues less running costs
cashflow evaluation techniques
NPV
gives a measure of expected value added by project
allows for time value of money and riskiness of cashflows
takes no account of length of project and timing of profit
IRR
+easily understood
may not exist/multiple solutions
gives no indication of the size of the project/profits
takes no account of the length of project or timing of profits
payback period
simple to calculate and communicate
takes account of the timing of the profit
ignores the time value of money and cashflows after payback period