Project Report on Financial Appraisal

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CAPITAL INVESTMENT PROGRAMMING
AND ITS FINANCIAL IMPLICATIONS

Budgeting and Financial Management
for
Local Government

April 2000

|David C. Jones, C.P.F.A., F.C.C.A.(UK), |and as: | |Research Fellow & Visiting Instructor, |President, Farsight Inc. | |Center for Urbanization Studies, |International Financial & Management Consultants | |Graduate School of Design, |4936, Andrea Avenue, | |Harvard University, |Annandale, | |48, Quincy Street. CAMBRIDGE. |Virginia. 22003. USA | |Massachusetts |Tel: 703-978-8564 Fax: 703-978-8014 | |Tel: 617-495-4964 Fax: 617-495-9347 |E-mail: dcjones2@cox.com | |E-mail: djones@gsd.harvard.edu | |

CAPITAL INVESTMENT PROGRAMMING AND ITS FINANCIAL IMPLICATIONS

BACKGROUND AND FINANCIAL FRAMEWORK

General

Capital Investment Programs are usually thought of as building things. This includes: development of land; erection of buildings; installation of roads, bridges, pipes and other infrastructure – above, on and under the ground; or, the supply of equipment for use on a semi-permanent basis.

Primary participants in these activities are mainly engineers. Thus, it is natural that they will be concerned to build and install, as rapidly as possible, the infrastructure and other fixed assets perceived to be urgently needed. They, after all, have the primary expertise for this task. A principal limit on the pace and magnitude of their work is, clearly, financial resources. A capital investment program, therefore, is an opportunity for prioritization of fixed asset implementation activity and the related access to urgent and important funding sources. It will also show how the vision and operational strategy of a community is reflected in the program for capital expenditures

Because of the very large Capital Investment Programs (CIP) to be financed, failure to consider the availability of funding could give rise to an undue sense of urgency. That might engender a disregard for the need to carefully examine each project component with due diligence. It is important, of course, to ensure that the necessary funding will be available, in full and on time, as and when needed for each project component. However, it is also important to ensure that:

a) each project component, as well as its size and scope, is selected on the basis of a rational prioritization, with reference to its financial and economic costs, measured against its benefits or effectiveness – economic, financial, social and equity; and

b) each project component represents the least economic cost of providing a sound solution to the concern being addressed.

These should be addressed on the basis of life-cycle costs. These allow for the capital costs and also the impact of these on recurrent finances, together with costs of operation, maintenance and administration. Also to be considered are the costs of replacement or rehabilitation of equipment that will not continuously serve with optimum efficiency, or even become unserviceable, during the life-cycle of the principal project assets. Analyses will need to allow for expenditure in later years to be discounted against earlier expenditures.

It is also important to take account of the extent and timing of revenue flows...
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