PROJECT ECONOMICS AND EVALUATION
The performance and development of various organizations are determined by the attributes of developmental projects that are enacted in the organization. It is beneficial for the managers and accountants to evaluate the viability of the projects enacted in the organization because they contribute towards the realization of goals and objectives. Over the period, various aspects of evaluation have been adopted and these include financial evaluation and non-financial evaluation measurements. Financial evaluation aspects consider the element of payback period, discounted payback period and the internal rate of return. These measures are ideal and beneficial in ascertaining the authenticity of the projects initiated by the management. According to this evaluation strategy, the non-profitable projects are neglected while the profitable projects are adopted. Similarly, non-financial evaluation measures captures on the non-financial determinants of business performance and they includes the aspects of customer loyalty, ethical practices, government regulations and the environmental factors amongst others. Certainly, these factors are of immense benefits to the managers because they help increase the performance of the organization by assisting the long term management of business factors. These factors have proven to be extremely beneficial in depicting the future establishment and performance of the business organizations. However, one disparity that characterizes the usage of non-financial evaluation techniques is the aspect of cost and time. The usage of these measures consumes significant amount of resources in terms of time and cost. In view of this revelation, managers and accountants should incorporate the usage of both financial and non-financial measure in evaluating the viability of the projects.
The periods of the recent past has been characterized with the emergence of significant number of organizations and the organizations have enhanced the attribute of engaging in various projects as these are the indicators of performance. The success or the failure of the organizational projects has the normally been referred to in terms of the gains or the losses to the organization. With the advancement of many projects in the organization, there is the need for the managers of the organizations to consider the aspect of adopting ideal project evaluation incentives. The adoption of an evaluation incentive is crucial because it enables understanding of the complexity of the project and it further necessitates development of the organization by providing a ground fro decision making. Over the period, various methods have been put forward to help explain the attributes of project management and the leading aspects of evaluation are the financial evaluation (quantitative) and non-financial methods (Qualitative method). The usage of these two methods has proven to be extremely crucial because they capture all the attributes of the organizational aspects. The developments of these factors are based on the consideration that the undertakings of the organizational projects have the consideration of capturing both financial aspects and non-financial aspects (Andrew, 2009). Financial evaluation is largely focused on aspects of profits and losses while non-financial evaluation is concerned with the depiction of the variables responsible for the success of the projects. In reality, the performance and the success of the projects are not concerned with the financial factors only but there are other attributes of non-financial aspects that are extremely critical for the development of the projects. Hence, evaluation of the projects calls for the inclusion of both incentives.
Non-financial project evaluation factors
The consideration of using non-financial factor in the evaluation of projects is an extremely critical incentive that provides the future performance of the project and helps the organization is the aspects of risk aversion. It is extremely beneficial for the management of the organization to consider that attributes of engaging non-financial project evaluation because has an attribute of contributing towards the future success of the projects (Andrew, 2009). Some of the non-financial appraisal factors are discussed below.
This is one of the non-financial factors that have immense contribution towards the success of the project and it influences perception of the project by the customers. Certainly, ideal projects are the projects that have an impact on the establishment of customer satisfaction. Customers have variable wants and needs that should be satisfied by the projects. In this regard, the project should reflect the will of the customers because customers are regarded as the kings in the conduction of business incentives and hence the call for the enhancement of project evaluation (Angelico A. Groppelli, 2006). Illegal and substandard projects have limited contributions towards the satisfaction of the customers and these projects are bound to fail.
Over the period, majority of the projects initiated by business incentives have failed to advance into maturity because of the negligence of the government attributes. The consideration of government attributes is extremely crucial and it helps in the realization of ideal projects according to the requirements of the law. The government has the role of regulating the performance of the business incentives because this helps in the protection for the consumers. One aspect of protecting the consumers against the provision of substandard commodities is the aspect of passing regulations and using the constitution to regulate the conduction of projects (Dayananda, 2011, Eugene F. Brigham J. F., 2008). This incentive by the government is classified as the non-financial factors that the managers and accountants must consider in order to ascertain the authenticity of the projects. In this regard, project evaluation must consider the analysis of the government regulations.
Further analysis of the non-financial project evaluation factors is the consideration of the backend sales that are generated to the company due to the investment in the some element of non profitable projects. Over the period, various incentives have been enhanced by the managers of the business and this has helped in the generation of more profits and one of the leading incentive that helps in the consideration of this fact is the aspect of investing in some non-profitable aspects and commodities with the aim of attracting more profits and sales to the company. Non-cash evaluation captures the incentives of these investments because of the benefits they accumulate to the company and this has been of immense benefit as it helps in the generation of more profits for the organization (Eugene F. Brigham M. C., 2011, Finnerty, 2011). Normally, the aim of engaging in this aspect is to enhance the understanding of the customers by assisting in them to locate the other products they need.
The observation of ethical practices is an extremely beneficial idea that enhances the illustration of the project. Ethics is an extremely critical aspect of evaluating projects and it does not involve the aspects of cash. The formation of the projects is governed by the elements of objectives and missions and these must be realized in ethical procedures. Ethical procedures are beneficial to the society and the stakeholders’ because of the enhancement of welfare establishment. The projects should have the capacity of increasing the welfare benefits and this reflects the conduction of ethical practices while on the other hand, unethical projects are not geared towards the realization of ethical practices. Ethical observation is one of the ideal incentives used in the evaluation of projects and it has proven to extremely crucial for the organizations.
Importance of non-financial factors
The attributes of non-financial factors provide ideal links for the establishment of long term organizational development. The usage of non-financial strategies involves the analysis of the factors that affect the performance of the projects and these include the certainty of business environment and the strengths of the internal strategies. This is in contradiction with the financial evaluation that provides financial information at the end of the accounting period. Long term continuity is the aim and objective of significant number of business incentives and this attribute is beneficial in enhancing this aspect of growth and development (H. Kent Baker, 2009). The usage of non-financial factors complements accounting financial strategies thereby leading to the aspect of developing long term development strategies.
The results from the analysis of the financial records has pointed out that the success of the organizations are largely influenced by the non-financial factors that are dominant in the completion of duties in the organization. Some of the factors that are responsible for the development of the organization have been identified as the intellectual capital, customer loyalty and ethical practices amongst others. This is opposed to the provisions of the financial records like the hard assets in the balance sheet and profit and loss account (Patel, 2000, Sell, 2008). In the view of the above incentives, the aspects of non-financial data have the attribute of providing indirect and quantitative factors that indicate the intangible assets of the firm.
Over the period, the goal of various organizational has been the maximization of benefits both in the short run and in the long run. In this context, analysis conducted has shown that the incorporation of non-financial elements in the organization in the organization is ideal and they result in the provision of certainty in the future financial statements and earnings of the firm. This establishment has proven to be extremely beneficial for major business incentives since it enhances continuity. The usage of financial evaluation attributes may be detrimental for the organization becaue they do not provide the future depiction of the business performance and this call for the reliance on the non-financial indicators that have provisions of the future development of the businesses and future profits.
Consequences of non-financial factors
The aspects of non-financial measurements of the projects have significant attributes that results in the consideration of enhancing project establishment because this incentive leaders to the realization of the roles played by the non-financial assets. The consequence of neglecting these attributes in decision making is the detrimental because the decisions made will result in the enhancement of adverse measures on the stakeholders whose interests are identified through non-financial attributes. The non-financial factors further consider the element of innovation, brand loyalty, employee relations and the management capacity (Susan V. Crosson, 2010). In reality, these attributes are extremely important for the performance of the organization as they lead to the enhancement of profitability.
Another significant disparity associated with the aspects of non-financial evaluation is the aspects of increased organizational costs and time allocation. Time and cost are some of the ideal factors leading to the completion of duties in the organization and the usage of non-financial aspects call of the implementation of different incentives. This may be detrimental for the performance of the organization because it will deprive the organization of the factors of time and money in the long run and short run (Prasanna Chandra, 2011).
The element of financial evaluation of the projects is also applied by the organization with the aspect of enhancing certainty of the capital investment projects and they provide crucial incentives regarding the investments of the organization. The aspects of investments in the non-current assets are risky ventures that require ideal evaluation of their financial repercussions to identify the degree of confidence in the projects. Some of the financial elements of accessing the financial benefits of the projects are identified as the elements of payback period, accounting rate of return and discounted cash flow techniques (Umukoro, Owolabi & Sulaimon, 2009). These measures highlighted are extremely beneficial because they highlight the benefits of engaging in the commission of the projects and further dictate the expected financial earnings from the projects.
The consideration of payback period is one of the commonly used financial evaluation technique for ascertaining the viability of the project. Over the period, the aspect so investing in the projects are based on the consideration of the expected values of returns. The management of various organizations has the capacity of considering development of their organization by engaging in the attributes of planning before the execution of financial investments. With the regard to this, the usage of payback period has proven to be an extremely beneficial idea that enhances the realization of the investment returns (Uwe Götze, 2008, Dayananda, 2011). This method is critical and it identifies the period of time taken by the project to generate the amount of resources in it. Payback period is critical because it highlights the viability of the projects and provides an incentive for the management to consider the investment.
Internal rate of returns (IRR)
The attributes of internal rates of returns are also beneficial in the establishment of financial evaluation of the projects. This is often used in capital budgeting where the net present value of all the cash flows from the project under consideration is equated to zero. In reality, ideal projects have higher internal rates of return. In view of this development, the aspect of IRR can be used by the managers and the accountants to ascertain the authenticity of the projects that are crucial for the organization before the investment in these projects (Umukoro, Owolabi, & Sulaimon, 2009). This aspect is critical because it has the capacity of identifying the element of development that is associated with individual projects. This incentive is also crucial because it provides the ground for comparing various projects on the basis of their internal rate of returns. This attribute is sometimes referred to as the economic rate of return and the projects with the highest rates of returns are considered for the investments. On the contrary, internal rate of return of the projects can be considered as the expected amounts that the projects are expected to generate and this explains why projects with higher IRR are adopted by the management of various organizations.
Discounted payback period
This reflects capital budgeting procedure that is used to ascertain the profitability of the projects. In this regard, it is beneficial in evaluating the profitability of the projects undertaken by the organizations. This evaluation strategy is ideal because it provides the duration in terms of the years that is considered before the realization of break even profits. Normally, the management of the project involves the realization of profits and undertaking of expenditures. The usage of discounted payback period is extremely beneficial because it helps in highlighting the number of years it takes for the organization to achieve break even states where the profitability of the organization is enhanced (Kaplan & Norton, 1996). Future cash flows are considered and discounted to time zero to reflect the attributes of benefits from the project and the time period involved. Normally, the projects with negative net present values have no discounted payback period because the initial outlay will never be fully paid. Therefore, the factors are beneficial in highlighting the development of the projects in the organization.
The usages of the above incentive of project valuation techniques have the capacity of enhancing performance of the organization because they help in the choosing of profitable projects for organizations. The performance of the organization is based on the projects that it undertakes. Therefore, the choice of the projects is extremely critical and the attributes of financial evaluation are used in the choosing the projects. In this regard, the performance of the organization is based on the factors influencing evaluation of the projects.
Finally, non-financial measures are increasingly becoming vital in the aspects of decision making and performance evaluation. The choice of the measures must be linked to the factors of the organization like the corporate strategy, organizational objectives, value drivers and competitive environment. Even though the business environment differs for various environments, the adoption of ideal business incentive should be based on the analysis of the internal factors and the objectives of the business organization. Project evaluation is beneficial as it enhances growth and performance of the organization. The choices of ideal financial and non-financial evaluation strategies are crucial for the organization because they enable long term development and continuity of the business organization.
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