Abstract
The feasibility and profitability of large investment projects are frequently subject to a partially or even fully undeterminable future, encompassing uncertainty and various types of risk. We investigate significant issues in the field of project appraisal techniques, including risks and uncertainties, appropriate risk analysis, project duration as well as the dependencies between (sub-) projects. The most common project appraisal techniques are examined addressing benefits and weaknesses of each technique. Furthermore, the practical use of the different techniques for the public sector is examined, exemplifying this with a small-scale analysis of the risk analysis procedures of the World Bank. Our finding suggest that in particular for the public sector, practical implementation of quantitative techniques like Monte Carlo simulation in the appraisal procedure of investment projects has not fully occurred to date. We strongly recommend further application of these approaches to the evaluation of processes and financial or economic risk factors in project appraisal of public sector institutions.
Highlights
Assessing the feasibility and profitability of large investment projects requires the consideration of various aspects and procedures
Our findings suggest that in particular for the public sector, practical implementation of quantitative techniques like Monte Carlo simulation in the appraisal procedure of investment projects has not fully occurred to date
As this paper focuses on project appraisal techniques for public financial investment projects, the classification of the financial risks will be of main interest
Summary
Assessing the feasibility and profitability of large investment projects requires the consideration of various aspects and procedures. The projected outcomes of feasibility and profitability are frequently subject to a partially or even fully undeterminable future, encompassing uncertainty and various types of risk. In undertaking procedures for analysing the risk and uncertainty surrounding a project, the potential outcome of project feasibility and profitability can be assessed. Investment appraisal procedures are generally carried out by applying cost-benefit analysis and/or risk analysis tools. Cost-benefit analysis (excluding the process of risk analysis) focuses only on either the mean or mode of the net present value (NPV) or internal rate of return (IRR) [1]. Well known and widely applied techniques include break-even analysis, sensitivity analysis, scenario analysis, risk analysis, decision trees and uncertainty analysis [2]
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