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For most companies, probably no other area of decisionmaking is as important as resource utilization 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 [5]. 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, along with other aspects, to arrive at project-investment decisions. Proper investment appraisal helps to ensure that the right project is undertaken, and in a manner that gives it the best chance of success.
For a major project, the economic evaluation may be carried out several times in different project phases in relation to the decisions needed in 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. Creating a detailed economic evaluation can be a time-consuming process, since each parameter in the evaluation must be verified. In the early phase 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 provide sufficient information to determine whether to proceed to the next project phase.
This article introduces a simplified economic evaluation applicable to the opportunity-scoping phase (feasibility study), which can be performed by anyone with basic economic knowledge. For example, with a proposed investment costing $1,000,000, yielding an annual savings of $300,000 before tax and the depreciation charge, what would be the approximate rate-of-return (ROR)? This simplified method provides quick information to facilitate decision-making in the early project phase. The intent of this article is to provide a simple tool for project managers without bypassing the professional business analyst's service for...