A Note on the Financial Evaluation of Projects


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Case Details:

Case Code : MISC009
Case Length : 22 Pages
Period : -
Pub Date : 2003
Teaching Note : Available
Organization : -
Industry : Banking & Financial Services
Countries : -

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Defining the Terms

Projects, by their definition, have a defined start and end date. A project is defined as "a collection of linked activities, carried out in an organized manner with a clearly defined start point and finish point, to achieve some specific results that satisfy the needs of an organization as derived from the current business plans."...

Financial Evaluation

The financial evaluation of a commercial project mainly involves estimating the return on investment and the profitability of the project. However, the financial evaluation of non-commercial projects involve the identification of the most efficient way of delivering the desired project outputs and ensuring that the project outputs result in significant benefits to the community...

Cash Flows from Long Term Funds Point of View

This method is based on the assumption that funds invested in a project come from both equity shareholders and long term lenders. When calculating net cash flows using this method, the interest paid on long term loans is excluded...

Cash Flows from Equity Funds Point of View

When cash flows are computed from the equity funds point of view, only the funds contributed by the equity holders towards the project are considered as an initial investment. The operating cash flow includes profit after taxes, depreciation, other non-cash charges and preference dividend...

Cash Flows from Total Funds Point of View

When cash flows are computed from the total funds point of view, the funds contributed by all the suppliers of funds towards the project are considered for the calculation of the initial investment...

Choice of Discount Rate

The next step in the financial evaluation phase is the determination of an appropriate discount rate. The determination of an appropriate discount rate is necessary for establishing the financial feasibility of a project...

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