EVALUATINGPROJECTS

INTRODUCTIONProject Appraisal a concept usually adopted by numerous organizations and project bodies; a look at the overall viability of a project with relation to its success; to ascertain whether or not a project is good or bad. The appraisal process however of projects can be likened to be viewed in two (2) basic forms: the financial otherwise referred to as the quantitative or tangible aspect and the non-financial which can and will also be referred to in this essay as either the qualitative or the intangible aspects. The former nonetheless, which is now viewed today in most of the popular literatures as a Traditional, aims to bring to bear the perception of an obsolete technique that has been served by a lot of academic writers as well as enterprise owners within the public and the private business sectors as inadequate. However, owing to the nature of the complexities surrounding investment projects and their strategic nature faced by accountants in organizations, evaluating projects therefore based on financial analysis still strives to determine viability as compared to the supposedly believed more strategic and non-financial approaches (Alkaraan and Northcott, 2006). However, in this essay, I wish to portray some different aspects of financial appraisal with regards to investment project evaluation and viability, the non-financial aspects as opposed to the financial aspects, the importance to take into consideration the non-financial (intangible) aspects, the need perhaps to integrate the non-financial approaches together with the financial approaches in deciding effective project evaluation criteria and how the estimation of risk factors although difficult can be mitigated with the consideration of the non-financial aspects in the evaluation of investment project appraisals.FINANCIAL TECHNIQUES IN PROJECT APPRAISALBallantine and Stray (1998) showed the need to offer more sophisticated financial investment approaches to project appraisals with particular emphasis on Information systems and technology projects. Ashford, Dyson and Hodges (1988) showed that although a lot of criticisms exist due to the use of financial methods such as NPV and IRR, these criticisms are actually based on misconceptions related to applications of these methods and stresses that they are usually employed first before the otherwise uncertain qualitative future assumptions are made. Hynek and Jancecek (2007) also talks about appraisal approaches for investing in Advanced Manufacturing Technology (AMT) projects; their study emphasized 3 approaches of which the economic approach which encompasses the use of capital Budgeting techniques is vital particularly with small projects and small scale investments which further aims to buttress the study of Pike (1996) that attributes the application of the financial appraisal models to firm size. Many authors however in their study of organizations and their use of financial appraisal techniques, attributes failure in determining the viability of investment projects not to the use of the different financial techniques but rather to the inappropriate application methodologies that is usually carried out with regards to the use of the financial/quantitative methods as therefore, stressing that these techniques shouldnt be downplayed in determining long-term decisions on investments (Finnie, 1988; Drury and Tayles, 1997). However, Accola (1994) argued that these financial project approval techniques often prompts firms to prefer investments with lower benefits and potentials to new strategic and innovative investments as the benefits inherent in strategic investments are more or less uncertain and unquantifiable. This further, opens up the fact that an over-dependence on financial project appraisal techniques may tilt decisions in project investment (Phelan, 1997), bringing to bear the need to for firms and organizations to take into consideration the intangible factors before embarking on projects, factors such as environmental, social, political, technological, legal and so on, as these factors play a vital role towards establishing the verve of investment projects.NON-FINANCIAL TECHNIQUES IN PROJECT APPRAISALTodays market and business environment is changing rapidly at a very fast pace taking into cognizance the increased rate of globalization and technological changes leading to hyper-competitiveness, requiring firms to adopt more flexible responses and approaches in their investment decision making processes (Slagmulder, Bruggeman and Van Wassenhove, 1995). Nixon (1995) highlighted the influence of internal and external stakeholders and their role in appraising investments and driving decisions a situation which could be otherwise termed as the political effect. Arnold and Hatzopoulos (2000) in their study involving UK firms showed that the traditional method used in appraising projects are grossly inadequate and thus other factors some of which involve staff availability, culture fit, political, environmental and social issues, management strain and so on, should be considered in other for a rational investment decision to be attained. Hoffman and Fieseler (2012) in accordance with a survey conducted takes Investments beyond financial methods to the roles non-financial aspects/factors such as building relationship with stakeholders, corporate governance and social responsibility, quality of communication, a firms branding and reputation as well as a host of other factors towards making fundamental investment decisions. Lopes and Flavell (1998), takes a peek into some crucial non-financial aspects involving roles of managers and heads in organizations, socio-political links, environmental, technical as well as organizational issues and the risk factors associated with these intangible aspects; how these can help in minimizing the risk factors to ensure successful evaluation and life cycle project planning, due flexibility in the project appraisal processes and essential lessons learned from the examination of past projects. Additionally, in accordance with Adler (2000), he views decisions by organizations regarding strategic investments as Quantitative Non-financial and as Qualitative comprising employee turnover, company image, improved information, roles of senior management and leadership as all these can aid the firm in making the right decisions towards enhancing their competitive advantage as well as tackle issues of uncertainty and risks.INTEGRATING THE FINANCIAL AND THE NON-FINANCIAL ASPECTSWith reference to studies and researches conducted by legions of academic writers a lot of companies and organizations are beginning to see the need to incorporate and align the financial as well as the non-financial appraisal techniques in determining the viability of projects and other related organizational investments. In accordance with Small and Chen (1997) on a study carried out with regards to project justification approaches by US manufacturers, they conclude that firms should adopt a more sophisticated approach which involves embracing hybrid strategies comprising of financial as well as non-financial techniques in deciding on manufacturing investment projects to ensure success. Moreover, academics following on numerous studies have developed various frameworks encompassing improved financial aspects as well as intangible techniques even as they aim to show the importance of integration (Lefley, 2004; Stewart and Mohammed 2002). Kaplan (1986) also argues that if an investment is projected to show a positive Net Present Value (NPV) based on financial data and analysis then, such an investment should be accepted. He however stated that not all benefits are easy to quantify thus some other factors such as adapting to market and new process technology should also be taken into consideration prior to investing in projects perhaps, integrating the financial aspects with the non-financial aspects (Meredith and Suresh, 1986; Bromwich and Bhimani, 1991) which according to Lefley (1996) can be viewed as consideration of the financial as well as the non-financial aspects in a strategic manner with a view towards flexibility in decision making regarding investments bringing in congruent terms knowledge in accounts as well as in engineering in determining investment project successIMPORTANCE OF NON-FINANCIAL TECHNIQUES IN PROJECT APPRAISAL AND RISK DETERMINATIONWith the growing conviction amongst firms and academics of the inadequacies associated with the financial appraisal techniques and the need to perhaps, adopt a non-financial approach that is believed to be more strategic in nature and best suited to make effective decisions regarding long-term investment projects. According to Harris and El-Massri (2011), in other to understand crucial capital investment decision processes, a thorough understanding of the complexities behind real-life situations has an important role to play as these decisions need not be overly quantified bringing to bear, the need to incorporate intangible factors in evaluating investment projects. Lofgren (2006) also states that the qualitative aspects on appraising projects carries with it, lots of benefits that are essential in enhancing production quality, business activities and creating novel opportunities which otherwise, cannot be accounted for with the traditional project evaluation methods.Moutinho and Mouta (2011b) argue that in the analysis of an investment project, the best ways usually take into account a host of non-financial areas. They moreover stressed that firms in choosing and evaluating projects should take into consideration 'Real Option Use' which involves non-financial factors such as abandonment, postponement, dimension alteration, change and so on. Dixit and Pindyck (1995) also emphasized holding on for new or current information relating to market conditions which could influence arrangement of the move for investment decisions (Carruth, Dickerson and Henley, 2000). All of these aims to show that there are some issues or perhaps, factors surrounding investment projects that are just difficult to quantify and demands that they be viewed critically and strategically in more dynamic ways. The Non-financial factors also bring some aspects of risk to bear. According to Adler (2000), it opens up a rather more sophisticated approach towards the assessment of risk and a more flexible approach in dealing and handling certain risk factors particularly with todays uncertain and rapidly growing business environment. Stirling (1999) aimed to show in his study that the so-called traditional method downplays crucial risk factors and cannot help in identifying possible risk parameters that are likely to be encountered when investment projects are considered. This therefore, aims to shed more light on the importance of the intangible aspects, how these actually helps organization involved with making strategic decisions cut down on possible risk factors that can plague investments and project undertakings from advanced manufacturing and production to improved information technology and information systems projects.An example with a view to evaluating and appraising investment projects can be seen in the case of Nghe An Tate & Lyle Sugar Company Project in Vietnam (Esty, 2004). During the post-war era/recovery phase of Vietnam, the Vietnamese economy experienced slow economic reconstruction as the country was still on the verge of breaking through the ravages/ruins of war and its poor economic financial situation. During this period, agriculture accounted for over 50% of the nations income as they were involved in the cultivation and commercialization of various forms of cash crops ranging from Coffee to Rubber and so on. Moreover, in the late 1990s, the volume of sugar produced in the country was about 40% less than the volume of sugar consumed. The sugar industry was controlled by the Vietnam Ministry of Agriculture Food Industry (MAFI). The MAFI as well as the Vietnamese government as a result of the high demand for Sugar in the country decided to enhance domestic sugar production and impose high tariffs on imported sugar in other that the country may become efficient and independent.The Company Tate & Lyle PLC, a company based in London and as at that time one of the worlds largest producers of sugar, had began expanding its geographical scope into other continents including Asia and saw the Vietnamese economy as a viable opportunity for investment as the country comprised a large population, was categorized with low sugar consumption, was a deficit country as it imported sugar and had a strong system of tariff that could make domestic sugar production more lucrative. The company however, got approval and commitment from the Vietnamese government to construct a Sugar factory that will boost domestic sugar production as well as consumption. The company was to be located in Nghe An one of the poorest provinces in the North Costal central region of Vietnam. This location (Nghe An) was plagued with poor road networks, infrastructures as well as high unemployment rate and although a lot of agricultural practices was carried out in the province, it mainly involved Rice, coffee and tree crops.Furthermore, in the case of financing the project after necessary cost estimates for the successful completion of the project had been derived, the company decided to look up to the International Finance Corporation (IFC) a member of the World Bank Group for funds for a percentage of the budget required to undertake the sugar project. The IFC was an attractive finance options as it would provide the needed protection against political risk as well as the provision of tax leverage. However, The IFC only supported projects that contributed to sustainable development and the extent to which it was fair to all parties and stakeholders concerned and not just paying emphasis to the financial rate of returns that will accrue to project financers. Thus, the IFC, in reviewing the project took into consideration some non-financial appraisal aspects such as the ability of the company to obtain sufficient supply of cane from farmers, , governments commitment to build new roads and bridges in the community that will aid easy and free transportation of goods and farm produce on a regular basis from the different fields to the mill, legal constraints involving government trade protection surrounding locally made goods as well as the impact of the role of external parties towards the success of the investment such as the role of employees, suppliers, customer and competitors. Therefore, in other for the IFC to conclude loan investments in projects, the interests and socio-economic benefits that will accrue to other groups other than the financers as well as the overall environmental impact was considered to determine commercial viability of the project.CONCLUSION A lot of firms and organizations involved in series of project appraisals and investments, still take solely into consideration the financial aspects as they merely focus on such factors such as the Net Project Value (NPV), the Return On Investment (ROI), Discounted Cash Flow (DCF), Payback Period and so on. These factors however believed to be easy to determine and basically derived by financial calculations and analysis involving figures and not limited to forecasting media have been deemed inadequate even as they tend to downplay crucial risk factors that has an increasingly important role to play in determining the viability of projects in todays fast-paced economy. However, theres been a growing need for firms to reconsider their project appraisal techniques and methods and factor into their appraisal processes other non-financial or qualitative aspects. This could perhaps involve integrating the financial and the non-financial aspects some of which are political concerns, socio-economic concerns, stakeholder interests, certain managerial functions and organizational behaviours as these factors can effectively drive the commercial viability of projects, generate increased interests amongst key participants that will be involved and can benefit from the entire investment project process. Thus, incorporating these non-financial aspects will aid in the better identification and handling of risk factors that are likely to be encountered during the projects life cycle through to the operational phase.

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