Project Financial Analysis Within a Firm

Abstract

The implementation of capital project approval techniques within a firm requires a disciplined approach with uniform and comprehensive evaluation standards. In addition, organizational guidelines need to ensure timely consolidation across projects within each business unit and corporate level for submission and approval. In this article, we provide insights into implementation issues in capital project evaluations within a firm. We discuss project evaluation and authorization guidelines, and economic and financial valuation models that include the financial benefits from the merits of the project, incremental cash flow analysis, and types of project evaluations. Next, we discuss the data requirements and collection process within a firm and the standardized documentation for submission to obtain corporate approval. We illustrate our approach with a detailed numerical example. This approach simplifies the evaluation process and facilitates sensitivity analyses, which enables the consolidation of projects both at the business unit and corporate levels. We hope that future research in financial analysis will further enhance this capital budgeting evaluation process and thereby guide both students and practitioners to better understand and appreciate the evaluation process.