Investment Criteria

3 Key excerpts on "Investment Criteria"

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  eBook - ePub

  Cost-Benefit Analysis

  • E.J. Mishan, Euston Quah(Authors)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  Part V Investment Criteria 21 Introduction to Investment Criteria 1 Investment Criteria are the bêtes noires of the economist. Although we shall begin by examining the more familiar proposals in the following chapters in order to reveal the particular difficulties inherent in proposals to reduce a flow of values over some time span to a single figure, we may as well mention such difficulties briefly at the start. First, the data are much harder to gather, or rather to predict, over future years than are currently available data. The unavoidable uncertainty of future benefits, disbenefits and outlays, may be dealt with in various ways. Yet, they are all somewhat arbitrary inasmuch as none can be anchored in the subjective preferences of those affected by the project being evaluated. Therefore, the treatment used to cope with uncertainty cannot be assumed, strictly speaking, to accord with a potential Pareto criterion. Second, even if it were the case that all the magnitudes for future benefits, disbenefits and outlays were absolutely certain, no investment criterion, no matter how sophisticated, can be sure of meeting a potential Pareto criterion. What is invariably being suppressed in the popular treatment of such Investment Criteria as discounted present value, or internal rate of return, is the basic economic rationale involved: what economic meaning can be attached to the magnitude arising from the application of any of these Investment Criteria? 2 Let us first be quite clear about the nature of these benefits and costs. An investment in, say, a railroad requires an initial outlay of capital to be spread over the first one or two years. These expenditures are clearly costs. So also are the anticipated outlays at future periods of time, whether for repairs, maintenance or for adding equipment, though their magnitudes are usually smaller than the initial outlays

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  eBook - ePub

  CAPEX Excellence

  Optimizing Fixed Asset Investments

  • Hauke Hansen, Wolfgang Huhn, Olivier Legrand, Daniel Steiners, Thomas Vahlenkamp(Authors)
  • 2011(Publication Date)
  • Wiley

    (Publisher)

  We follow a six-step approach to help managers select the best individual investments from a large pool of opportunities. The approach is by definition based on the assumption that the total investment level is restricted because of budget limitations. All the investment options are also assumed to be within the same market or business area. Therefore, we can evaluate all projects against the same hurdle rate (as shown in the previous technical insert, most companies apply business unit-specific hurdle rates. This can easily be implemented in the project ranking by taking the excess return above hurdle rate as ranking criteria). Furthermore, we assume that all the investments are independent of each other, i.e. none of the investments are mutually exclusive, nor are there any portfolio effects or interdependencies between the projects. (At the end of this section we will describe briefly how it is possible to modify these assumptions. 54) Step 1: Define the criteria that the investment projects will need to fulfill and that will be used in their subsequent evaluation. These criteria should include all the necessary minimum requirements. They can be quantitative, for example, in terms of the maximum project duration or minimum effect on revenues, and/or qualitative, for example, in fulfilling specific regional criteria or quality-related prerequisites. This list should also include one key decision criterion (e.g. the Net Return on Investment), including its “hurdle rate” (below which the investment is unacceptable), if this is applicable. Step 2: Identify all the individual investment opportunities. All the opportunities should be recorded in a standardized manner, e.g. in a central investment proposal database. In order to ensure that all the various opportunities are fully comparable, all the fields (i.e. the basic project information and the criteria identified in Step 1) should be defined clearly

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  eBook - ePub

  Return on Investment Manual

  Tools and Applications for Managing Financial Results

  • Robert Rachlin(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Nevertheless, it is quite clear that most companies use project classifications that deal with profit improvement or cost savings, expansion, replacement and maintenance, new products, and non-income-producing projects. Factors Involved in the Investment Decision In any investment decision many questions must be considered. These are questions that go into making up the final decision regarding “go” or “no go.” Although the answers to different questions will have varying weights, all of these questions must be considered in the thought process preceding every project. Some of these questions may not apply to some projects, but a checklist should be made so as not to overlook any crucial decisions that may have an impact. To help a company understand each of the complex variables, a brief explanation will be given for each variable, which will be phrased in the form of a question. Each investment will have its own characteristics and should be considered as a separate entity when evaluating the merits of the expenditure. Remember that each capital investment must be evaluated as if nothing else existed. In other words, the capital investment must be supported on its own merits. What are the alternatives? Consideration must be given to reviewing alternatives to the proposed investment. Each proposal should have an alternative, although the alternative may very well be to do nothing. If this is the case, one must ask the following question: What are the consequences over the short run and over the long run? Management should be presented with alternative options whenever possible. How important is the investment? Each investment opportunity must be classified as to its importance in terms of both size and survival to the company. Investments that are very important receive a more critical review by more individuals and at higher levels within the organization

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