PRINCE2 7th Edition Investment appraisal
An investment appraisal compares the costs of developing, operating, and maintaining the project product with the value of the benefits over a period of time.
The investment appraisal examines the relationship between benefits, costs, and risks. It should cover the project costs (both in producing the required products and the project management costs) and the ongoing operations and maintenance costs.
There are many investment appraisal techniques available to organizations that will often have preferences on which technique to adopt for specific projects. The selection of techniques may be influenced by the type of business (such as those that have to follow public sector accounting rules) or the organization’s standards.
Examples of investment appraisal techniques include the following:
Whole life costs: analyzing the total cost of implementation and any incremental transitional, operational, and maintenance costs.
Net benefits: analyzing the total value of the benefits minus the cost of implementation, transition, and ongoing operation, calculated over a defined period
Return on investment (ROI): profits or savings resulting from investments expressed as a percentage of the initial investment
Payback: a measure of time to remunerate the investment of cash and other resources
Net present value (NPV): an amount of money that the investment will have earned by a particular point in time that considers the time value of money using a discount rate to determine discounted cash flows (For example, if the discount rate is six per cent, the value of money halves approximately every 12 years. Therefore, if a project forecasts a £500,000 benefit to materialize in year 12, it is only worth £250,000 in today’s money.)
Internal rate of return (IRR): a percentage that indicates the rate of return on investment when the NPV is zero
Options analysis: a comparison of the options by scoring each option against weighted assessment criteria to help identify a preferred option (Pairwise comparison can also be used to differentiate between options to establish the shortlist and preferred option.)
Sensitivity analysis: adjusting the input factors to model the point at which the output factors no longer justify the investment.
For example, a project might be worthwhile if it can be done in four months but ceases to be valuable if it takes six months.
Business cases are based on uncertain forecasts. To identify how robust the business case is, it is helpful to understand the relationship between input factors (such as project costs, timescale, quality, scope, and project risks) and output factors (such as operations and maintenance costs, business benefits, and business risks).
PRINCE2 Multi-case model
Evaluating investments from different perspectives, rather than focusing solely on financial return, gives a rounded view of whether an investment is desirable, viable, and achievable. Examples of some different investment perspectives include:
● strategic perspective: understanding the drivers for change and demonstrating how the investment provides strategic fit
● economic perspective: identifying the option that delivers best value, including wider social, environmental, and sustainability considerations
● financial perspective: assessing affordability, funding, budgeting, and cashflow over the life of the project and project product
● implementation and commercial perspective: showing that service providers can deliver the preferred option and that robust arrangements are established for successful project delivery.
For an investment to be robust, it should be able to demonstrate that it satisfies all these perspectives. The business may have developed its own set of cases for developing business cases, such as an environmental case, and policies regarding their use.