Investment Appraisal Techniques

Through Life Costs
  • Through-life costs Analysing the total cost of implementation and any incremental operations and maintenance costs
Net Benefits
  • Analysing the total value of the benefits less the cost of implementation and ongoing operation calculated over a defined period

ROI (Return on

investment)

  • Profits or savings resulting from investments (this is the same as net benefits if the benefits were only financial)
Payback Period
  • Calculating the period of time required for the ROI to ’repay’ the sum of the original investment
Discounted Cash Flow
  • A means of expressing future benefits based on the current value of money
  • Sometimes discounted cash flows include risk adjustments as the business may not be confident that all the benefits will materialize
Net Present Value
  • The total value of discounted future cash inflows less the initial investment
  • For example, if inflation is at 6%, the value of money halves approximately every 12 years. If a project is forecasting a £500,000 benefit to materialize in year 12, then it is only worth £250,000 in today’s money
Sensitivity Analysis
  • Business Cases are based on uncertain forecasts
  • In order to identify how robust the Business Case is, it is useful to understand the relationship between input factors (e.g. project costs, timescale, quality, scope, project risk) and output (e.g. operations and maintenance costs, business benefits and business risk)
  • Sensitivity analysis involves tweaking the input factors to model the point at which the output factors no longer justify the investment
  • For example, the project is worthwhile if it can be done in four months, but ceases to be worthwhile if it were to take six months

 

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