Project Selection, Investment Appraisal, Cost Management, Funding Measures And Risk Identification

Importance of Project Selection and Investment Appraisal Techniques

Discuss about the Project Risk Finance & Monitoring.

The project selection process is an adequate measure, where the organisation needs to accommodate adequate measure and techniques for understanding the relevant returns from investment, which could be generated from projects. The use of investment appraisal techniques could eventually help in understanding the level of returns, which could be negated from a particular project. Investment appraisal techniques such as Net Present Value, Internal Rate of Return, Payback Period and Profitability Index can be used in understating the finial viability of a particular project. These measures also help in evaluating different projects and understand their capability to maximise their profitability and minimise risk from investment. In this context, Baum and Crosby (2014) stated that with the help of investment appraisal techniques companies are able to pick the most profitable project, which could generate high rate of return from investment. On the other hand, Li and Trutnevyte (2017) criticises that investment appraisal techniques mainly loses its fiction if the assumptions made for the analysis is not adequate, which would directly nullify the results obtained for the projects. Therefore, with accurate assumptions, discounting rate, and cash flow projections companies can use the investment appraisal techniques for identifying financial viability of the project. Rio Tinto before accepting a particle project mainly use different level of investment appraisal techniques for selecting the project.

Cost management is an effective measure from which business are able to minimise the total expenditure and maximise their profitability. The measure also helps in understanding the level of expenses, which could be conducted for minimising any kind of risk from investment. The major role of project cost management is to conduct certain activities such as resource planning, cost estimating, budgeting, and cost control. The different roles conducted by cost management might help in minimising the cash outflow and maximise the level of returns from investment. On the other hand, Higham, Fortune. and Boothman (2016) criticise that the different level of cost management could minimise the overall expense of essential operations, which might hamper profitability of the organisation. The major significance of cost management is that it helps in minimising the overall expenses that could incur from operations of the organisation. The relevant strategies such as budgeting could be conducted by the organisation for minimising the excessive expenses and maximise its profitability from operations. The different segments of budgeting system could be used by the organisation for managing the project cost and maximising profitability from operations. Alkaraan (2017) mentioned that with the use cost cutting measures organisations are mainly able to save essential resource and capital expenditure on activities, while maximining the relevant income from investment. Companies operating in auto manufacturing industry directly uses different level of cost management schemes for minimise the production cost and maximising their profitability.

Role of Cost Management in Maximizing Profitability

There is different level of funding measures, which is used by the organisation for fund their new project and minimise the return form investment. Both internal and external source of finance could be used by the organisation for funding the projects, which could help in improving the level of returns from investment. In addition, the internal source of funding could be identified, as retained earnings, and capital from family, which could help in financing new projects. In this context, Lefley (2018) stated that identification of adequate funding source is essential, as the organisation could acquire the required level of return from investment. The major external source of financing are bank loans, mortgage, and share issue can be used by the organisation for funding the project, which could maximise their profitability. The different type of funding that is enlisted in the above measure mainly helps in understanding different level of funding measures, which is used by organisation for generating high level of returns from investment. Companies mainly use bank overdraft and loan process for supporting operation of the new project, which could help in generating high rate of return from investment.

The new projects could have certain risk involve in investment such as technical, cost, schedule, client, contractual, weather, financial, political, environmental, and people. These are some of the risk involved in the implementation of a new project, which could incur in future. Moreover, any kind of changes in the current operation of the organisation would directly have an impact on the implementation stage. Therefore, from the evaluation it could be identified that without conducting adequate risk mitigation method the organisation would minimising the negative impact on implementation of the project. Kolawole (2016) mentioned that companies by identifying the risk are able to minimise the risk involved in investment, which could generate high level of returns from investment. The project mainly wounds up when the anticipated returns that is provided from investment is not projected to the company. The project is not ended abruptly, as the organisation evaluates resources and infrastructure of the project, which could help in understanding the level of changes required to achieve the targeted returns. Companies operating in Auto Manufacturing Operation directly utilises the implementation and winding up method for analysing the current operations of the company, which could help in generating high level of return from investment.

After the evaluation of the overall source, it could be identified that Myer currently does not have any kind of capital issue, as the company’s shares are all time low, which is affecting its market capitalisation. The company is facing low financial performance, which is directly affecting its capability to support profits from operations. Majority of the company raise equity capital to support their operations and expand their business. With the help of equity capital companies are mainly able to maximise their productivity and expand their current operations.

Different Funding Measures

The evaluation on operation of Myer mainly helped in detecting the company operational capability, which is directly affecting its share price and market capitalisation. Due to intensive competition the company’s operations mainly declined in Australia, which is why the market capitalisation of the organisation feel from 2.4 billion in 2009 to 400 million in the current era. The evaluation of source mainly indicated that the company is facing challenging retail environment, where heavy discount, reduced customer foot traffic and online shopping is affecting profits of the company. The company’s declining profits is the main reason behind the decline in its equity capital, where the share price of the company fell from $4.10 in 2009 to $0.54 in 2018.

Year	0	1	2	3	4	5
Incremental revenue		CAD   5,500,000	CAD   5,610,000	CAD   5,722,200	CAD   5,836,644	CAD     5,953,377
Cost		CAD   2,200,000	CAD   2,244,000	CAD   2,288,880	CAD   2,334,658	CAD     2,381,351
Depreciation		CAD       500,000	CAD       500,000	CAD       500,000	CAD       500,000	CAD         500,000
Salvage value						CAD     7,500,000
Profit from store sale						CAD     1,500,000
PBT		CAD   2,800,000	CAD   2,866,000	CAD   2,933,320	CAD   3,001,986	CAD   12,072,026
Tax		CAD   1,120,000	CAD   1,146,400	CAD   1,173,328	CAD   1,200,795	CAD     4,828,810
PAT		CAD   1,680,000	CAD   1,719,600	CAD   1,759,992	CAD   1,801,192	CAD     7,243,216
Depreciation		CAD       500,000	CAD       500,000	CAD       500,000	CAD       500,000	CAD         500,000
Working capital	CAD (2,000,000)					CAD     2,000,000
Initail Investment	CAD (10,000,000)
Cash Flow in Canadian Dollar	CAD (12,000,000)	CAD   2,180,000	CAD   2,219,600	CAD   2,259,992	CAD   2,301,192	CAD     9,743,216
Cash Flow in Australian Dollar ($1 AUD will buy $1 Canadian dollars)	AUD (12,000,000)	AUD   2,180,000	AUD   2,219,600	AUD   2,259,992	AUD   2,301,192	AUD     9,743,216

Year	0	1	2	3	4	5
Cash Flow in Australian Dollar ($1 AUD will buy $1 Canadian dollars)	AUD (12,000,000)	AUD   2,180,000	AUD   2,219,600	AUD   2,259,992	AUD   2,301,192	AUD     9,743,216
Discounting factor	1.0000	0.9524	0.9070	0.8638	0.8227	0.7835
	AUD (12,000,000)	AUD   2,076,190	AUD   2,013,243	AUD   1,952,266	AUD   1,893,196	AUD     7,634,064
Cost of capital	5%
NPV in Australian Dollar	AUD       3,568,960

Year	0	1	2	3	4	5
Cash Flow in Australian Dollar ($0.95 AUD will buy $1 Canadian dollars)	AUD (11,400,000)	AUD   2,071,000	AUD   2,108,620	AUD   2,146,992	AUD   2,186,132	AUD     9,256,055
Discounting factor	1.0000	0.9524	0.9070	0.8638	0.8227	0.7835
Discounted cash flow	AUD (11,400,000)	AUD   1,972,381	AUD   1,912,580	AUD   1,854,653	AUD   1,798,536	AUD     7,252,361
Cost of capital	5%
NPV in Australian Dollar	AUD       3,390,512

After evaluating all the relevant measures and calculation, Myer is advised to commence with the project, as it will have a positive impact on the operations and income of the company. In addition, the valuation also indicates that the project is delivering positive NPV value, which will in turn increase company’s profit and firm value in future. In this context, Throsby (2016) stated that with the help of investment appraisal techniques companies are able to identify the relevant viability of the project, which could generate high level of returns from investment. Therefore, it is advised to Myer to adopt the new project for increase their profits and maximising the profit from its investment.

Reference and Bibliography:

Alkaraan, F., 2017. Strategic Investment Appraisal: Multidisciplinary Perspectives. In Advances in Mergers and Acquisitions (pp. 67-82). Emerald Publishing Limited.

Almarri, K. and Blackwell, P., 2014. Improving risk sharing and investment appraisal for PPP procurement success in large green projects. Procedia-Social and Behavioral Sciences, 119, pp.847-856.

Awojobi, O. and Jenkins, G.P., 2016. Managing the cost overrun risks of hydroelectric dams: An application of reference class forecasting techniques. Renewable and Sustainable Energy Reviews, 63, pp.19-32.

Batra, R. and Verma, S., 2018. Non-financial criteria in project appraisal methodologies: empirical evidence from Indian companies. International Journal of Accounting and Finance, 8(1), pp.80-102.

Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.

Brisley, R., Wylde, R., Lamb, R., Cooper, J., Sayers, P. and Hall, J., 2016. Techniques for valuing adaptive capacity in flood risk management. Proceedings of the ICE-Water Management, 169(2), pp.75-84.

Higham, A.P., Fortune, C. and Boothman, J.C., 2016. Sustainability and investment appraisal for housing regeneration projects. Structural Survey, 34(2), pp.150-167.

Kolawole, O.A., 2016. Assessment of the Reliability of Techniques Employed in Feasibility and Viability Appraisal. Assessment, 7(15).

Lefley, F., 2018. Dispelling the Myth Around the Financial Appraisal of Capital Projects. IEEE Engineering Management Review, 46(1), pp.47-51.

Li, F.G. and Trutnevyte, E., 2017. Investment appraisal of cost-optimal and near-optimal pathways for the UK electricity sector transition to 2050. Applied energy, 189, pp.89-109.

Locatelli, G., Invernizzi, D.C. and Mancini, M., 2016. Investment and risk appraisal in energy storage systems: A real options approach. Energy, 104, pp.114-131.

Throsby, D., 2016. Investment in urban heritage conservation in developing countries: Concepts, methods and data. City, Culture and Society, 7(2), pp.81-86.