The appraisal of investment projects: A teaching approach

The ultimate outcome of a public or a private investment is determined by the financial, economic, managerial and political parameters associated with the project. A financial or economic net present value (NPV) calculated on a few sets of input variables tells one very little about the potential of a project if its managerial capability is weak and its political support is fickle. While any analysis has its limitations, a project evaluation that closely links the financial and economic analysis, and in turn identifies the distribution of benefits and costs over the various interest groups, will be far more likely to identify fatal flaws in the design of a project than will an appraisal that segments the analysis and does not address the interdependencies of the components. A key outcome of the appraisal of a project is the identification of the aspects of the project that have the potential to inflict great damage to its performance. With this information the next step is to see if the project can be redesigned (organizationally, financially or physically) so that it becomes more robust and resistant to external or internal shocks. In order to have project evaluations carried out in this way the project analysts should be comfortable with the skills of financial analysis, welfare economics, the evaluation of alternative sources of project uncertainty and estimation of the distribution of costs and benefits across interest groups.