Every organization has goals that it needs to achieve. However, with the increasing number of projects in which companies are involved in the need for an appraisal process often comes into light. According to Chen (2011), lack of commitment, discipline, and follow up is often found in a number of companies that do not have the right project appraisal process in place. These companies do not often meet their strategic goals thinking that all the projects are of the same importance (Hawes & Eng 2011).
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In Chen’s works, he continues to define the term project as a plan that is usually presented by a company for a careful consideration to be worked upon depending on the resources it utilizes. In addition, projects are often investments that are after developing certain facilities or giving of services to the clients in a given area over a period of time. There are often projects to develop mobile handsets, provision of network, marketing plans, or communication.
Hawes & Eng (2011) continues to state that therefore, companies involved in the project appraisal process often manage a group of current or proposed projects based on the organization’s strategic goals, the hard economic measures, or the technical goals. In order to analyze a given project, the question often arises: what is the project’s expected total cost? What is the cost of the resources being involved in its development?
How much time is expected in order to complete the project? Alternatively, what is the relationship between the projects in question with the others? Thus getting to know the project that a given company should invest in depending on a number of criteria dictates the benefits the company should expect (Kester, Hultink & Lauche 2009).
Managers are mostly the ones in charge of projects and more often keep track of these projects to know the ones that are worth the time of the company. Project Appraisal is thus a process designed to help organizations acquire and keep track of all its projects that it is involved in and to arrange them according to their importance.
In addition, the projects can be prioritized in order of their strategic values, amount of resources they consume and the cost of investment that helps the company determine whether to proceed with the project or not. Moreover, every project manager would want to have enough resources available to complete more projects that are important within time and budget (Melik 2008).
Project appraisal is more of a structured analysis of a project using various project appraisal techniques (Killen, Hunt & Kleinschmidt 2008). Therefore, the need to use various techniques to analyze the viability of a project is vital more so in cases where the resources both financial and human are scarce.
Some of the techniques used in appraisal process include Net Present Value (NPV), Internal Rate of Return (IRR), Project Risk (PR), payback period, value added, capital output ratio, proceeds per unit of outlay, asset pricing model, average annual proceeds per unit outlay and Accounting Rate of Return (ARR). The techniques are discussed in much detail below with case studies where project appraisal has been in use.
Net Present Value (NPV)
In 2008, Melik stated that NPV should be calculated for every project so that all the proposed projects in the portfolio project management can be compared. NPV is the numerical calculation that shows the potential value of an investment based on the income that is expected should the company decide to invest in the given project less the cost of the project. NPV compares the investment project with other alternatives that the company might wish to invest on (Killen, Hunt & Kleinschmidt 2008).
They continue to assert that therefore when using this kind of selection criteria only projects with positive NPV are considered for funding unlike those with negative NPV. According to a journal, Ixos Partner Program published in 2000 positive NPV is an implication that the investment project at hand is better and more likely to fetch higher income than an alternative project. In addition, NPV is not limited on guesses about what might happen in future. It is known that NPV relies entirely upon the accuracy of expected income.
Negative NPV on the other hand is an implication that the alternative project is better off in terms of resources to be used and the cost of investment. Thus, a project manager is expected to advise the company to invest in the alternative project or if it was in the case of borrowing funds for a project, they need to be funded from the alternative source that would be more economical (Neverauskas & Cutiene 2011).
Internal Rate of Return (IRR)
This return often compares the profitability of the projects invested on by an organization. If an organization is involved, for example would be four projects, all the projects are listed in the order in which they are expected to profit the company and the project with higher profits is invested on unlike the other projects.
By setting a higher discount rate, it is discovered that the net present value would be at zero implying a higher rate of return on the chosen project. Projects with lower rate of return imply that huge amounts of cash will be spent on them with less returns (Killen, Hunt & Kleinschmidt 2008).
According to Ixos Partner Program (2000), it is important to assess a project’s risk in order to know whether it could be of any importance investing in the project. This brings into light the balance of risk verse the reward on the project.
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Accounting Rate of Return
The accounting rate of return is used mostly during the time of the comparison. This accounting technique mostly estimates the worth of a given project the company is involved in comparison with the alternative projects that the company might invest in case of failure of the main project. However, this accounting method is disadvantaged since it uses profits to determine the worth of a project rather than the incoming cash.
This would affect the results to be used in determining the worth of a project since it is difficult to know the exact profit from an investment without having any knowledge about the cash inflows.
However, a nice advice on the effect of using the net present value and the internal rate of return can easily be identified when using a net present value curve. This curve will give independence of different interest rates and their net present values at different market times in a year.
With a clear understanding of the use of the appraisal techniques, a closer look at two case studies of Huawei and AT & T is necessary. These two companies that have evolved over time in the technology world. However, both provide different services, while Huawei is the leading global ICT solutions provider, AT & T provides network to its clients (Hawes & Eng 2011).
In detail, the two case studies of Huawei and AT & T are discussed while assessing the current situation of the two companies regarding the use of project appraisal. Moreover, the motivation that has enabled the two companies changes their current situation and the benefits that they got from their changes to the use of project appraisal techniques.
Huawei Case Study
China is one of those countries that grew economically at a fast rate (Killen, Hunt & Kleinschmidt 2008). In addition, it saw the technology sector expanding at a high rate because their products were in high demand in overseas countries.
According to Huawei Technologies (2002), some of the projects China was involved in included fixed line-communication, mobile industry, optical transmission, data communication, and the development of the mobile handsets. Because of the challenges the Huawei Company faced in the industry it decided to turn to the appraisal process to solve them.
Moreover, the Huawei industry had a limited number of project managers since their industry had grown at a fast rate and had clients even in overseas countries. Because of this, they were thinking of a new way to handle their projects that had to be delivered in time, hence they decided to come up with a system that had to take into consideration all the projects that were to be implemented by the Huawei company. The system was universal to cover all the clients since it would not be possible to reach them in person.
In addition, before the telecommunication industry grew to cover overseas countries, Huawei were merely a manufacturer of mobile phone handsets and optic cables. However, due to their market that was advancing mostly to the overseas countries there was a need to take into consideration customer complaints and hence had to care for them by giving them solutions on ways to use their products. By so doing, they became more of a solution provider and manufacturer (Hawes & Eng 2011).
Other challenges were internal that prompted the change of the management structure to accommodate a project manager. In addition, the customer problems were on the increase and the customers needed project managers who were many qualified and this called for the project managers to be certified personnel.
This led to Huawei devising training classes for its project managers so that they can be competent. Hence, by practicing project appraisal process, Huawei managed to establish a competent and qualification standard for its project managers and good communications channels with the outside world that covered their customers.
AT & T Case Study
According to a PMI Case Study (2002), AT & T’s main focus was to improve the project management processes and ensure that it had competent project managers and that were recognized within the organization for their services. The project appraisal process was mainly brought about as a result of the merging of the portfolio management practices between the legacy companies that had a different focus. Thus, the company had to find a way to merge the strengths and the roles of the other legacy companies.
In addition, the AT & T had a lot of clients who needed different services and therefore it was important to find out the services that were most important to their clients. Finally, because of the expanding number of clients, communication was important that would make it possible to get feedback from customers to be able to know their problems.
Because of these challenges the AT & T Company had to turn to project appraisal. Therefore, the AT &T company had to deal with the problems in stages. Firstly, was the initial stage where the importance of the resources and needs were assessed?
Next, the project management team had to determine the kind of project from the other legacy team that was of value to the project management team of AT&T. Next they had to ensure that the project was delivered on time and within budget. In addition, the goals of any business team were reported in monthly basis and finally were the integration of the legacy team and the lessons learned were used in future planning to avoid similar problems.
To solve the communication barrier, formal communication was introduced to project management team so that they can handle customer problems. In addition, annual symposium was held that promoted communication skills and training to project managers. By practicing the project management techniques projects were often completed in time and ahead of schedules (Hawes & Eng 2011).
Both of these companies shared the notion that good communication skills are key to getting to know more about customer problems and both used the method the appraisal project process techniques in meeting the company goals. Even though the use of project appraisal techniques to analyze a situation before investment by a company is beneficial there are certain shortcomings faced by the methods.
The use of net profit value to determine the viability of a project will use assumptions about the income in the future and relies entirely on the income history of the given company.
For example, the straight-line assumptions tend to imply that income of a company would increase tremendously over a given period something that can never be true as in business there are times when it would be booming and other times when it would be operating at a loss. Therefore this impacts on the outcome of the results as the management of the companies that be working on high income figures of a project that would not be forthcoming (Melik 2008).
Moreover, the uses of the appraisal project techniques use the discount rate assumption that relies heavily on the market. Markets have more often-cyclical nature and hence they might change at the time of analysis and the real situation while implementing the project. Moreover, there is the problem of making accurate forecasts. In addition, the use of NPV does not take uncertainty into consideration as misfortunes at times might occur in any business.
Furthermore when using the asset pricing model values should be assigned to the rate of return, the return on the market and the equity risk premium. However, the rate of return is not fixed as it changes more often thus it would not give exact figure of what might be happening in the market. For example some of the projects that have failed due to these errors include digital trunked radio system, the overstock.com’s 4 year ERP Nightmare and the euro turner project.
From the above observations it is very clear that project appraisal is not an exact science. Science can be defined as a systematic body of knowledge in reference to a specific field of study that includes facts that explain given ideas. It tries to institute the causes of dissimilar relationships amid two or more variables and underscores the principles governing their connection.
The body of science is characterized by having universally acceptable principles, and a given conclusion is reached through experimentation and given observation (Killen, Hunt, & Kleinschmidt).
However, it does not imply that management does not have a systematic body of knowledge but it is not as exact as that of other physical sciences like biology, physics, and chemistry. The main reason for the inexactness of the project appraisal techniques is that they deal with human beings and this makes it impossible to predict the behavior of a human being.
Project managers have therefore a vital role to play when analyzing a project using the above techniques. From the initial stage to the final stage of implementation, while monitoring the project each time to discover any problems with evaluation stage. This is the area where the project manager needs to show their leadership skills in maintaining the relationship among the different team players that are critical to the success of any project (Alicia & Lynn, 2007).
This paper briefs on the theoretical understanding of project appraisal and the techniques that are used to determine the viability of a project and a clear life analysis situation of two case study areas where the project appraisal was of great help.
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