Project finance and capital investment require a different approach from day-to-day operations, an approach that takes into account:
- the timing of cash flows (money in year 1 is worth more than money in year 5)
- the risk involved – riskier project have to earn a higher return to justify taking the risk
- the real value created, not simply that which shows up in the transaction-based accounts
There are six financial criteria that are normally used to evaluate projects:
- payback period
- discounted payback period
- net present value
- internal rate of return
- modified internal rate of return
- profitability index
Why six? Because each considers the project from a different perspective and, as you will see if you take one of our courses, when considering competing projects the criteria will often push you in opposing directions.
In our project finance courses we consider some of the more challenging issues such as:
- identifying the relevant cash flows
- choosing between projects of unequal length
- factoring in risk
- evaluating projects with continuing value
However, the most challenging aspect of project finance is not the financial functions, it is arriving at the correct number to plug into those formulae.