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For most companies, probably no other area of decision-making is as important to its success as resource use and evaluation. Management is constantly faced with a wide array of possible resource investment alternatives and is responsible for the funds entrusted to its care [4]. Project investments involve the expenditure of capital funds and other resources to generate future benefits, whether in the form of profits, cost savings, or social benefits. For an investment to be worthwhile, the future benefits, in any form, should compare favorably with the prior expenditure of resources needed to achieve them. Economic evaluation is a vital part of investment appraisal, dealing with factors that can be quantified, measured, and compared in monetary terms. The results of an economic evaluation are considered with other aspects to arrive at project investment decisions. Proper investment appraisal helps to ensure that the right project is undertaken in a manner that gives it the best chances of success.
For a major project, economic evaluation may be carried out several times at different project phases in relation to the decisions needed at each phase. A detailed economic evaluation including selling prices, production volume, fixed costs, variable costs, depreciation/depletion charges, working capital, initial capital investment, etc., is required for the final project funding decision. A professional business analyst usually prepares a detailed economic evaluation to ensure the quality and validity of the evaluation. The detailed economic evaluation can be a time-consuming process since each parameter in the evaluation must be verified. In the early phases of a project, the capital cost estimate is based on the "order of magnitude" method during the feasibility study. A less detailed economic evaluation may suffice to provide sufficient information to determine whether to proceed to the next project phase.
This paper introduces a simplified economic evaluation applicable to the opportunity scoping phase (feasibility study), which can be performed by anybody with basic economic knowledge. For example, with a proposed investment costing $1,000,000, yielding an annual savings of $300,000 before tax and depreciation charge, what would be the approximate rate of return (ROR)? This simplified method will provide quick information to facilitate decision-making in the early project phase. The intent of this paper is to provide a simple tool for project managers...