1. Investment decision making
Chapter 4
Investment decision making

2. Learning objectives
explain the key phases and associated information flows in an investment management process
explain the purpose of a feasibility study and how it relates to a business case
prepare and analyse a feasibility study
prepare and analyse a business case for a proposed project
discuss a variety of approaches for project prioritisation
use a range of techniques to help make investment decisions

3. A project is an investment like any other The main phases
of an investment management process are:
Selection of the portfolio
Control of ongoing projects
Evaluation of completed or cancelled projects

5. Feasibility study The purpose is to:
determine if a business opportunity is possible, practical and viable
provide a structured method:
to focus on problems
identify objectives
evaluate alternatives along with associated benefits and costs
aid in the selection of the best solution
improve confidence that the recommended action is the most viable solution to the problem
assure the sponsor that projects requiring significant resources can, should and will be done.

6. Business case development
The purpose of a business case is to:
obtain management commitment and approval for investment, through a clearly presented rationale
provide a framework for informed decision making in planning and managing the project and its subsequent benefits realisation.

7. Business case perspectives
There are five main perspectives of a business case to consider in its preparation (OGC, 2003):
Strategic fit
Options appraisal
Achievability
Commercial aspects
Affordability
The amount of detail needed in a business case depends to a large extent on the total cost of the project.

8. Progressive development of a business case
For large-scale investments, the business case can be developed in progressive stages
For example, a three-stage process might generate the following components (OGC, 2003):
Preliminary business case
Outline business case
Full business case

9. Capital budgeting
A set of techniques used systematically to evaluate, compare and select projects
Decisions often have an impact for many years and as such reduce an organisation’s flexibility – an important opportunity cost

10. Project Appraisals
The purpose is to assist an organisation in deciding whether a project concept is worth turning into reality
The following concepts are important when conducting a project appraisal:
Financial vs economic appraisal
Externalities and their valuation
Cash flows and sunk costs
Cash flow analysis

12. Cash flow analysis
To establish the value of a project, a financial evaluation is carried out
Preliminary information required will include:
the evaluation period
project risk
an organisation’s cost of capital
the cost of doing the project

13. Prioritisation techniques
Many methods are available for prioritising projects, most of which fall into one of the following categories (Martino, 1995):
financial analysis
decision tree analysis
scoring and ranking
portfolio optimisation
simulation
real options
cognitive modelling
cluster analysis

16. The prioritisation techniques used should reflect the following considerations:
The degree of business risk involved.
The organisation’s internal and external environment.
The corporate governance regime (for example balance of shareholder versus stakeholder focus).
Cost of prioritisation activities compared to expected project returns.