Project Appraisal Techniques
At times organizations tend to have lots of projects being started but they are not evaluated properly. As a result of that those projects will have a larger a risk of failing and when it does persons tend to play the blame game. That’s really not the way to do it when looking at the grand scheme of things.
You have many tools that you can use to evaluate a project and one of them is project appraisal. What is project appraisal? Project appraisal is a set of techniques you can use to evaluate your project before it starts or during a project.
This is really important because it helps to reduce the risk to a certain extent that comes with executing a project properly. It will help you to see if your return on investment is worth it, the risks that are involved etc.
This strategy should be performed in any organization because businesses usually perform a lot of projects. These can range from marketing, research and development, new product line etc. It would be like a crystal ball telling you how successful your project can be.
Furthermore it will help you to know if it’s worth your team time. You could even use it to analyze a project to see if it’s worth your investment and if not you could save back cash which would’ve otherwise gone down the drain.
You have quite a few techniques you can use to go about executing your project appraisal strategy. Below you can see a list of some of them.
Profitability index
This technique will help you to see if your investment in terms of cash in a project is going to be worth it in the long term. To calculate it is pretty simple. You are going to divide the present value of the future cash flows of the project by the first initial investment. You can give your project a go ahead only if it has a profitability index of 1.0.
Payback period
The payback period is a method you can use to evaluate a project’s ability to give back a certain amount of return in terms of cash in a certain amount of time. More often it would be the original investment that will need to be paid back.
So for example you are investing $500,000 on a project. And you would like to have back your return in a 3 year period. If you’ve evaluated that project and your return looks like it’s going to take a bit longer. Probably that’s not the right project for you.
Net present value
When using net present value it will help you to calculate how profitable your project will be at a future time due to your current investment.
You can calculate this by finding the difference between your current value of cash inflows and current value of cash outflows. You could even use it to compare the profitability of two or more alternative projects.
Above are just some of the project appraisal techniques you can use in your organization. You also have a couple others. But using these methods above will greatly impact your decision making when it comes on to taking on a project.