BUSF_A01.qxd

Routines for use with investment projects

profitable opportunities overlooked by one business will probably be taken up by

another. Any business that regularly overlooks opportunities must sooner or later fall

by the wayside.

Members of staff need to be encouraged to identify new products, new markets,

new ways of supplying those markets and new approaches to production. Technical

help should be available to help staff to develop ideas into formal investment

proposals.

Assembling the relevant data for an investment proposal

Estimates of the relevant costs associated with the proposal must be made. The

estimation probably needs to be carried out by a financial manager. Care must be

taken to gather all relevant costs and benefits. There is a danger that bias can influence

some of the cost estimates, particularly where a manager is strongly in favour of

or against the proposal. If an independent financial manager can carry out this task, it

may help to promote freedom from bias.

Assessing the data and reaching a decision

The data must be fed into the decision-making model that the business is using.

Assuming that the business is a wealth maximiser, this model should be NPV. Once

again this process demands certain technical skill and freedom from bias, so it is best

carried out by someone who has those attributes, such as a member of the business’s

finance staff.

Implementing the decision

Action needs to be taken to get the project under way. A project team may well be

established to take the necessary steps.

Monitoring the effects of the decision

Reviews, sometimes known as post audits, need to be carried out to try to assess

the effectiveness of the project. One of the reasons for this is to assess the quality of the

decision-making process, so that improvements in this process can be sought and

instigated in respect of future decisions.

The progress of the project must also be monitored to assess whether or not it is

economic to continue with it. Periodically, over the life of the project, the question as

to whether the project should be abandoned needs to be raised. The project will not be

able to continue indefinitely – plant wears out, markets decline – so identifying the

economically optimum moment for its abandonment is important. For the wealth-

maximising business, this process logically involves an NPV analysis of the relevant

costs and benefits of continuation relative to those associated with abandonment.

Investment decisions in practice

Pike (1996) found that 72 per cent of the 100 large UK businesses surveyed by him

in 1992 carried out a post audit on ‘most major projects’. The 1992 study was a

continuation of a longitudinal study of investment practices of large UK businesses.

‘