PROJECT ECONOMICS AND EVALUATION
Executive
summary
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.
Project
evaluation
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.
Customer
satisfaction
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.
Government
regulation
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.
Backend
profit/sales
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.
Ethical
practices
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).
Financial
evaluation
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.
Payback
period
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.
Conclusion
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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