Capital Finance Decisions for project managers - A reflection on current methods

Abstract

This paper evaluates some of current financial investment selection methodologies for capital projects. The proc ess (and criteria) of capital investment decisions is reviewed. The capital budget for most organisations is prepared annually by a committee of senior managers who then present it for approval by the board of directors. Investment proposals are usually subjected to two financial tests, "payback" and "internal rate of return (IRR)". The management committee usually decides on the tests and acceptance criteria vary according to the type of project. Some shortcomings of these most frequently used current tests (Payback & IRR) are identified and it is recommended that the Net Present Value (NPV) should be used as the primary method for analysing, comparing and selecting capital projects.