Project Analysis
Project Analysis
Marko Hartmann, 2010-10-15
Indroduction
Most companies prepare each year a list of investment projects planned for the next coming year: The annual capital budget. However, being in the list of investments proposals not mean automatic go ahead with this project. Managers have to ask themselves what makes a project tick, what are the main uncertainties and how can you recognize these at an early stage. Therefore, we learn to use different kinds of analysis –methods like sensitive analysis, break-even analysis and Monte Carlo simulation. Options concerning which to expand when a project has a rising yield or which to abandon when things seem to be going wrong, called real options. We look at the real options, mostly constituting in desicion trees at the end of this documentation.
The Capital Investment Process
Investment proposals for the annual capital budget are mostly made “bottom-up”. They are sometimes inconsistent and have to be embedded in the company’s strategic planning which takes a ”top-down” view of the company. Therefore, you need to establish consensus forecasts of economic indicators to build a consistent basis for the capital budget.
Project Authorizations
After the capital budget has been admitted, the next step is to authorize each project. Therefore you need to submit an appropriation request which includes: - Detailed forecasts - Discounted cash-flow analysis (DCF) - Back-up information The final desicion is made by senior management, but it is the nature of the beast that forecasts are often biased and tend to be over optimistic while project risks are understated. Even if senior managers cannot wipe out bias completely they should learn to challenge the forecast critically.
Capter 11; Project Analysis
1
Post audits
Appropriation requests approve the investment, the project has begun to run. But it is not advisable to lay back and let things take its course, you have to keep a check on the progress if you
Marko Hartmann, 2010-10-15
Indroduction
Most companies prepare each year a list of investment projects planned for the next coming year: The annual capital budget. However, being in the list of investments proposals not mean automatic go ahead with this project. Managers have to ask themselves what makes a project tick, what are the main uncertainties and how can you recognize these at an early stage. Therefore, we learn to use different kinds of analysis –methods like sensitive analysis, break-even analysis and Monte Carlo simulation. Options concerning which to expand when a project has a rising yield or which to abandon when things seem to be going wrong, called real options. We look at the real options, mostly constituting in desicion trees at the end of this documentation.
The Capital Investment Process
Investment proposals for the annual capital budget are mostly made “bottom-up”. They are sometimes inconsistent and have to be embedded in the company’s strategic planning which takes a ”top-down” view of the company. Therefore, you need to establish consensus forecasts of economic indicators to build a consistent basis for the capital budget.
Project Authorizations
After the capital budget has been admitted, the next step is to authorize each project. Therefore you need to submit an appropriation request which includes: - Detailed forecasts - Discounted cash-flow analysis (DCF) - Back-up information The final desicion is made by senior management, but it is the nature of the beast that forecasts are often biased and tend to be over optimistic while project risks are understated. Even if senior managers cannot wipe out bias completely they should learn to challenge the forecast critically.
Capter 11; Project Analysis
1
Post audits
Appropriation requests approve the investment, the project has begun to run. But it is not advisable to lay back and let things take its course, you have to keep a check on the progress if you