1.3 Financial appraisal of projects

Cash can be thought of as just another resource that business has to manage along with materials, fuel, water, labour and so on. It is the responsibility of managers to ensure that their organisation is using its cash, like other resources, in the most efficient way. They have to determine whether a particular project is worth investing in or which of two or more proposed projects that are competing for the same cash resources should be funded. The for-profit sector has to demonstrate the financial sense of proposals if it hopes to convince people to buy shares in the company, the public sector has to demonstrate that it is using the public’s funds wisely, and the not-for-profit sector needs to demonstrate its financial probity to its governors and trustees and possibly to the appropriate regulators.

In the following subsections, you will learn how to use and interpret the results from some basic financial appraisal tools.