The assessment of financial viability of projects and financial efficiency.

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Project Financial Appraisal Techniques

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Definition of financial evaluation
Concern with the assessment of financial viability of
projects
 Assessment of risk profile and financial efficiency

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Why Project Financial Evaluation
Does the project create financial wealth
How quickly can we recover project investment
How risky is the project vis a viv it returns potentials
How much capital do we need to invest

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Financial Evaluation Techniques For
Effective Project Management
Payback Period Return On Investment Profit Based
Measures
Net Present Value
Method

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Payback Period Technique
Payback Period
This is probably the most frequently used technique for assessing the financial viability
of projects. It regards projects which repay their capital cost most quickly as being the
best. For example, if a cafe purchases a new cooker for £1000 and makes an average of
£.50 profit on each meal, the cooker will be paid for after £1000/£0.50=2000 meals. If
the cafe sells 40 meals a day, the full price of the cooker is paid back after
2000/40=50days.
Attempt this question now:
Frank and Mary decided to set up a carpet cleaning business. They purchased carpet
cleaning equipment for £800. On average they expect to earn £5 per carpet after
expenses and to be able to clean two carpets, five days a week. Calculate their payback
period in weeks

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Payback Period Technique
The payback period is ( £800/ £5x2x5) = £800/50=16weeks.
You will appreciate as a project manager that the calculations above are rater
simplistic.
The capital cost of equipment or machinery is fairly easy to work out. It is how much
the organisation paid for it together with delivery, installation and other costs
incurred to get it up and running. But how is income calculated?
And you know that income does not always flow in evenly

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Project Management – Revenue & Cost
Projections
Project Management In Practice
Hampdene Ltd is a company specialising in arable farming. It is thinking about
purchasing a combine harvester for a capital cost of £160,000 to be used from
August to early October on its fields. It will also be rented out to a neighboring
farm for the remainder of October. Harvest income flow in from October to December
and total sales are expected to bring in £60,000 in year 1, £66,000 in year 2 and
£70000 for each year from year 3 to year 8 (additional competition in world
markets is faced in the later years). Running costs of the combine harvester are
estimated at £4000 a year for year 1 and year 2 and £5000 for each year
thereafter. Seeds fertilisers and other costs of production are generally 50 percent
of sales income.
Rental income from hiring out the vehicle is estimated at £2000 per year for the
foreseeable future. While not in use, storage, security and maintenance expenses of
the combine harvester are estimated at £1000 per year.
Your task is to use a separate sheet and put together the projection of revenue and
costs including net profit or loss for this project.

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Project Management – Revenue & Cost
Projections- Answer
Year 1
£
Year 2
£
Year 3
£
Year 4
£
Year 5
£
Year 6
£
Year 7
£
Year 8
£
Income:
Crop (sales) 60000 66000 70000 70000 £70000 £70000 £70000 £70000
Rental 2000 2000 2000 2000 2000 2000 2000 2000
62000 68000 72000 72000 72000 72000 72000 72000
Outgoings
Running costs 4000 4000 5000 5000 5000 5000 5000 5000
Storage etc 1000 1000 1000 1000 1000 1000 1000 1000
Cost of
production of
crop
30000 33000 35000 35000 35000 35000 35000 35000
35000 38000 41000 41000 41000 41000 41000 41000
Net Income 27000 30000 31000 31000 31000 31000 31000 31000

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Project Management – Pay Back Period
Technique In Practice
Year Net Income
£
Additional
Overheads
Final
net income
(ie Net income
less additional
overheads)
Cost of combine
harvester less
final net income
(£160000)
Year 1 27000 8000 19000 (141000)
Year 2 30000 7000 23000 (118000)
Year 3 31000 6000 25000 (93000)
Year 4 31000 5000 26000 (67000)
Year 5 31000 5000 26000 (41000)
Year 6 31000 5000 26000 (15000)
Year 7 31000 5000 26000 11000
Year 8 31000 5000 26000 37000

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Project Management –Net Present
Value Technique v Time
Initial Investment
£
10% Yearly Interest
£
Total Money Available
£
100 10 110
110 11 121
121 12 133
133 13 146
146 14 161
161 16 177

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Project Management –Net Present
Value Technique v Time
Year Net Income
£
Additional
Overheads
£
Final
net income
(ie Net income less
additional
overheads)
£
Discounting
Factor for 10%
Present Value of
projected net
income
£
Year 1 27000 8000 19000 .909 17272.73
Year 2 30000 7000 23000 .826 19008.26
Year 3 31000 6000 25000 .752 18796.99
Year 4 31000 5000 26000 .685 17808.22
Year 5 31000 5000 26000 .621 16149.07
Year 6 31000 5000 26000 .565 14689.27
Year 7 31000 5000 26000 .513 13333.33
Year 8 31000 5000 26000 .467 12149.53
Total Present Value of all
future net income 129207.4
Present value of capital to
be invested
(160000)
Net Present Value -
difference between Present
Value of future net income
and capital to be invested
-30792.6

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Conclusion – The End
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