Business Core · Finance · Module
Investment appraisal
How proposals to commit capital are judged before approval, and compared afterwards with what they actually delivered.
The idea
How it works
Discounted cash flow asks a plain question: is the money a project returns, adjusted for when it arrives and for the risk it carries, worth more than the money it consumes? Net present value answers in currency; internal rate of return and payback answer related questions, and Graham and Harvey’s survey of practice found that most organisations use several side by side. Each measure has a known blind spot, which is the argument for reading them together.
The appraisal is half of the discipline. Projects approved on forecasts that are never checked teach the organisation nothing about its own forecasting, and the post-investment review is where that learning happens. This module owns the method, the approval criteria and the review. How much money is available in the period is set under Budgeting; the lifetime cost of an individual asset is worked out under Lifecycle in Business assets and enters the appraisal as an input; the value of keeping an option open under uncertainty is treated with Golden opportunities in the Time Core.
Working with it
In practice
- 01
Appraise cash, not accounting profit
Depreciation and cost allocations change reported profit without moving money. The appraisal follows cash in and out, period by period.
- 02
Read more than one measure
NPV shows size, IRR shows rate and payback shows exposure. A project strong on one and weak on another deserves a closer look.
- 03
Record the discount rate and its basis
A rate adjusted until the project passes is hard to detect afterwards unless the reasoning was written down at the time.
- 04
Book the review at approval
Fix the date and the measures of the post-investment review when the project is approved, while the forecasts are still on the table.
One level in
The components of investment appraisal
A component is something that exists afterwards which did not exist before — a deliverable or a mechanism, not an intention.
Project appraisal
The projected cash flows, the rate, the resulting measures and their sensitivity, for one proposal.
LearnInvestment criteria
The standards every proposal is judged against, and who may approve at what size.
LearnPost-investment review
What each approved project was expected to deliver, what it did deliver, and what the difference teaches.
Learn
Set the review date when the project is approved. A forecast that is never compared with an outcome has no way of improving.
The other modules in finance
Budgeting
Allocating money to intentions for a period ahead. A budget is a set of decisions expressed in numbers, not an administrative exercise.
LearnForecasting
A current estimate of where the numbers are heading, updated as the world changes. Distinct from the budget, which is a commitment.
LearnCash flow
Money actually moving in and out, by date. Profitable organisations fail here, which is why it is tracked separately from profit.
LearnFinancial reporting
Turning transactions into a statement of what happened, for people who have to decide something on the basis of it.
LearnFunding and capital
Where the organisation’s capital comes from, on what terms, and what each source asks in return. Funding is a set of relationships as well as a balance.
LearnTax
Tax as a consideration in strategic decisions — where the business is taxable, how structure and cross-border flows affect it, which incentives apply, and the conduct the organisation has chosen.
Learn