ADDIS ABABA UNIVERSITY

SCHOOL OF COMMERCE

MSc in Corporate Finance: Specialty in Investment Management

An article review on: Project Appraisal: A reflection

Reviewed by: Section-3

GROUP MEMBERS ID NO
1) Wayiso Koche GSE/2741/16
2) Sisay Tonkolu GSE/3646/16
3) Yared Begashew GSE/8455/16
4) Taera Zarihun GSE/3439/16
5) Yirgalem Nigussie GSE/6867/15

Submitted to: Mengistu A. (PhD)

 GENERAL INFORMATION

Title: Project Appraisal: A reflection

Author(s): Moutinho, Nuno; Mouta, Helena
Journal: Published in peer-reviewed journals
Year/Issue date: 2011
Volume: 15
Page: p.251-257
1. ABSTRACT

1.1 Main Findings:

For a comprehensive project appraisal, traditional financial metrics like NPV and IRR
are insufficient on their own.
Non-financial aspects such as strategic, technical, commercial, organizational,
human resource, management, political, social, and environmental are all
important to consider.
In a project appraisal, the capital structure, agency problems, governance, and
real option use, and stakeholders are all aspects that have to be considered in an
investment decision making.
The Analytic Hierarchy Process, Fuzzy Decision Methodology, Financial
Appraisal Model, Multi-criteria analysis, ELECTRE approach, and Cost-benefit
analysis are all important methodologies to analyze and apply to projects to help in
decision-making.
 SIGNIFICANCE…

1.2 Significance:
Improved Decision Making: by incorporating multi-dimensional factors, the study
equips decision-makers with comprehensive framework for evaluating projects.
Practical Utility Across Industry: the multi-criteria approach is adaptable across
industries, enabling firms to tailor project evaluations to specific contexts.
Contribution to Practical and Academic Frameworks: the article advances both
academic knowledge and practical applications, benefiting evaluators, project
managers, policymakers, and investors.
Overall significance: the study is crucial for shaping how organizations evaluate and
select projects, ensuring decisions are comprehensive, sustainable, and strategically
aligned with both organizational and global priorities.
2. INTRODUCTION

2.1 Background Information:

The study explores project appraisal tools and methods, emphasizing the integration of

non-financial and financial aspects that enhances decision-making.

Key Aspects of Project Appraisal:

a) Economic Evaluation: This typically includes analyzing financial metrics like NPV, IRR &

PBP in investment decisions.

b) Technical Feasibility: Examines whether the required resources, technology, and

skills are available to execute the project successfully.

c) Environmental and Social Impact: an assessment of the project’s effects on the

environment and community to ensure sustainability.

d) Risk Analysis: Identifies and evaluates potential risks (financial, operational, and

political) to develop mitigation strategies.

 IMPORTANCE…

2.2 Importance of the review:

a) Modernize Project Appraisal: The review highlights the limitations of traditional financial
methods and advocates for a more comprehensive approach that includes non-financial
aspects & others.
b) Contribution to Knowledge: The article investigates and criticizes existing project
appraisal approaches, adding to academic and practical conversation. A review emphasize
essential insights and methodologies, as well as explore how they advances understanding of
project appraisal and decision-making.
c) Practical Applications: Project appraisal is critical to guaranteeing the success of
investments. Reviewing this work assists in identifying actionable ways for enhancing real-
world project evaluations and bridging the gap between theoretical models and their
practical applications.
d) Relevance to Stakeholders: Understanding the latest perspectives in project appraisal
benefiting project managers, investors, and policy makers make better decisions and
OBJECTIVES AND SCOPE OF THE REVIEW…
2.3 Objectives and scope of the review:
a) Objectives of the Review:
To understand important aspects that have to consider in project analysis,
To determine whether companies have the adequate tools and methods.

b) Scope of the Review:

The review provides a comprehensive examination of project appraisal methodologies,
addressing their evolution, current limitations, and opportunities for improvement.
Key Areas Within Scope:
Traditional Methods: evaluation of NPV, IRR & PBP, highlighting strengths and limitations.
Non-financial Criteria: strategic, technical, commercial, organizational, & etc. factors.
Holistic Frameworks: Introduction of MCDA approaches for balanced and robust appraisal.
Risk Management: include risk analysis (probability, sensitivity and simulation), and
identifying project-related aspects, to provide a higher level of confidence in the final decision.
 3. THEMATIC OVERVIEW/LITERATURE REVIEW

3.1 Summary of Key Themes:

 The study’s key themes highlights the need for paradigm shift in project appraisal,
moving from a narrow financial metrics to holistic, multi-dimensional frameworks. This
approaches better addresses behavioral and organizational factors, and business
perception, which should be adequately adjusted to invest with success.
 Key Themes Summary:
 Limitations of Traditional Financial Metrics: are insufficient alone for comprehensive
evaluations.
 Non-Financial Factors: intangibles are critical in order to take the best investment decision.
 Holistic Frameworks: Multi-criteria approaches provide balanced, robust evaluations.
 Other Aspects: Capital structure, the agency problems, the governance and real option,
management and governance are all factors that have to be considered in decision making.
 Stakeholders Engagement: importance in strategic decision making process.
 Continued…

3.2 Comparison and Contrast Of Different Studies:

i. Financial Metrics in Project Appraisal:
 “Gitman and Forrester (1977) refer that investment evaluation methodologies can
be Payback period and accounting profit rate (accounting data) or based on NPV
and IRR. While, Skitmore at al. (1989), Adler (2000), Chen (1995), Meredith and Mantel
(2000), Love et al. (2002) and Lopes and Flavell (1998) present non-financial aspects,
in addition to financial aspects, that have to be considered in project appraisal”.
 Comparison: both agree that financial metrics are foundational.
 Contrasts: the later focuses on non-financial aspects and importance of risk
evaluation.
 Continued…

ii. Integration of Non-Financial Aspects:

 “Nardini (1997) suggests an ideal appraisal process that includes a balance sheet, comparison of
alternatives, scenario creation, evaluation indices, and analysis of impact categories, negotiation, cost-
benefit analysis, and public participation. This approach ensures a trade-off between conflicting criteria,
enables a negotiated solution, and connects affected people. Lopes and Flavell (1998) emphasize the
importance of personal opinions and perspectives in decision-making processes, influencing risk
probabilities and consequences. They suggest that companies can create lists of risk indices, attributing
qualitative weights to each item, based on personal experience, feedback, expert analysis, and the
inclusion of diverse individuals in decision-making”.
 Comparison:
o Both approaches emphasize the inclusion of diverse perspectives, whether through public participation (Nardini) or
organizational diversity (Lopes & Flavell).
o Both methods value qualitative factors, with Lopes & Flavell placing a stronger emphasis on subjectivity.
o Both recognize the need to address conflicts between different criteria or stakeholders (Negotiation & trade-offs).
 Contrasts:
o Nardini advocates for a formalized process with defined steps, while Lopes & Flavell favor a more flexible, intuitive approach.
o Nardini explicitly incorporates external stakeholders and public involvement, whereas Lopes & Flavell focus primarily on
internal organizational decision-makers.
o Nardini includes tools like cost-benefit analysis and evaluation indices, which are absent in Lopes & Flavell’s approach.
 4. METHODOLOGICAL EVALUATION

4.1 Assessment of the Methodologies:

a) Financial & Non-Financial Metrics:
 Strengths:
 Identifies the gaps in traditional financial metrics, reinforcing the need for holistic evaluation.
 Doesn’t dismiss financial metrics but integrates them into a broader framework.
 Limitations/Financial:
 Narrow Focus: They focus exclusively on financial performance, ignoring non-financial factors.
 Assumptions: These methods typically rely on assumptions such as constant cash flows
and a fixed discount rate, which may not reflect the dynamic nature of real-world projects.
 Ignores Uncertainty: Methods like NPV and IRR do not fully capture the risks and
uncertainties involved in projects, which can lead to over-optimistic projections.
 Limitations/Non-Financial:
 The study doesn’t fully address how to quantify non-financial aspects.
 Challenges in quantifying qualitative factors.
 CONTINUED…

b) Multi-Criteria Analysis (MCA), AHP, CBA, ELECTRE Method, Fuzzy Decision

Methodology & Financial Appraisal Model.
Methodology Overview:
Multi-Criteria Analysis (MCA): A decision-making framework that evaluates projects
based on multiple criteria, both qualitative and quantitative. It involves ranking or
scoring alternatives based on various factors like costs, benefits, environmental impact,
and stakeholder preferences.
Analytic Hierarchy Process (AHP): A specific MCA method that breaks down a
decision problem into a hierarchical structure, allowing decision-makers to evaluate
project options based on relative importance and pairwise comparisons of criteria.
 CONTINUED…

Strengths:
 Holistic Evaluation: MCA allows for the inclusion of both financial and non-financial factors

(e.g., environmental, social, technical), providing a more comprehensive evaluation.

 Stakeholder Involvement: It is particularly useful in projects involving multiple stakeholders with

different priorities, as it allows the inclusion of subjective criteria.

 Flexibility: MCA can handle both qualitative and quantitative data, and can be adapted to a

wide range of project types.

Limitations:
 Complexity: The MCA process can be time-consuming and resource-intensive, particularly

when large numbers of criteria or alternatives are involved.

 Subjectivity: The evaluation process is susceptible to bias in weighting criteria and assigning

scores, which can affect the outcome.

 Data Quality: The effectiveness of MCA depends heavily on the availability and accuracy of data

for each criterion.

 CONTINUED…

c) Risk Analysis (Sensitivity vs. Real Options Analysis)

Sensitivity Analysis: Sensitivity analysis evaluates how changes in key assumptions (such as cost estimates or market

conditions) affect the project’s financial outcomes. It is often used in conjunction with traditional financial models like NPV.
Real Options Analysis (ROA): Real Options Analysis treats investment decisions as options, allowing for flexibility in

responding to uncertain future conditions. It applies financial options theory to evaluate the value of having the ability to

alter or delay a project based on future events and available information.

Strengths of Sensitivity Analysis:

 Simplicity: It is relatively easy to conduct and interpret, providing a clear picture of how sensitive a project’s outcomes

are to changes in critical variables.

 Identification of Key Risks: It helps to identify which assumptions or variables have the most significant impact on

project success, aiding in risk management.

Limitations of Sensitivity Analysis:

 Assumes Linear Relationships: Sensitivity analysis assumes that changes in variables have linear effects on the

project, which may not be the case in real-world scenarios.

 Limited Scope: It does not account for the flexibility to adapt to changing circumstances, which is crucial in projects

with high uncertainty.

 CONTINUED…

Strengths of Real Options Analysis:

 Flexibility in Uncertainty: ROA is particularly suited to projects with high

uncertainty, allowing decision-makers to value the flexibility to make decisions in the

future based on evolving circumstances.

 Dynamic Decision-Making: Unlike traditional models, ROA considers future

opportunities and the ability to delay or modify decisions as conditions change.

Limitations of Real Options Analysis:

 Complexity: ROA requires advanced financial modeling and is more difficult to

implement than traditional methods.

 Data-Intensive: Accurate projections of future market conditions and risks are

necessary, which can be difficult to obtain in practice.

 CONTINUED…

4.2 Biases Encountered:

a) Sampling Design: Sample design for survey research, the size of firms surveyed to

evaluate trends in project appraisal across different industries or geographies is not

explicitly indicated.

b) Subjectivity in Non-Financial Appraisal: Non-financial factors like strategic alignment,

organizational impact, or social and environmental considerations are inherently subjective.

The weight assigned to these factors could vary significantly depending on the evaluator's

perspective.

c) Data Availability and Reliability: Intangible factors such as human resource readiness,

management quality, or societal impact are difficult to measure accurately and may rely on

qualitative judgments or incomplete data.

 CONTINUED…

d) Potential Confirmation Bias: The study’s critique of traditional financial metrics may

lean towards validating the importance of non-financial factors without fully exploring the

continued relevance or advancements in financial appraisal techniques.

e) Lack of Longitudinal Analysis: The study appears to focus on static evaluations rather

than examining how project outcomes align with initial appraisals over time. Without

longitudinal data, it is difficult to validate whether incorporating non-financial factors

consistently leads to better project outcomes in the long run.

 5. THEORETICAL AND PRACTICAL IMPLICATIONS

5.1 Implications of The Findings For Theory Development:

Project Appraisal: Expands traditional frameworks to include non-financial and qualitative
factors.
Strategic Management: Strengthen the importance of strategic alignment and competitive
advantages in project evaluations.
Risk Management: New pathways for risk management and contingency-based appraisal
frameworks to offer a higher level of confidence in final decision.
Integration of Stakeholder Perspective: Enhanced integration of stakeholder inputs in
the appraisal process, which aligns stakeholder perspectives into decision-making.
Organizational Learning: Advancement of theories that link project evaluation with
strategic goals and organizational learning.
 CONTINUED…

5.2 Practical Applications Of The Research Outcomes:

 The Article findings provide actionable strategies for decision-makers to improve project
appraisal processes by integrating financial, non-financial, and contextual considerations.
This leads to:
 Decision-Making Framework: combine financial/non-financial metrics for evaluation.
 Stakeholder Engagement: incorporate stakeholder feedback into the appraisal process.
 Strategic Alignment of Projects: ensure projects align with organizational goals and
competitive strategies.
 Risk Management: broaden risk assessment to include reputational and social risks.
 Appraisal tools: conceptualize to create standardized evaluation tools.
 Training and Learning: advocate on integrating qualitative and quantitative factors in
appraisals.
 6. FINDINGS

6.1 Major Findings:

 For a comprehensive project appraisal, traditional financial metrics like NPV and IRR are
insufficient on their own.
 Non-financial aspects such as strategic, technical, commercial, organizational, human
resource, management, political, social, and environmental are all important to consider.
 In a project appraisal, the capital structure, agency problems, governance, and
postponement options are all aspects that have to be considered in an investment decision
making.
 The Analytic Hierarchy Process, the Fuzzy Decision Methodology, the Financial Appraisal
Profile, the multi-criteria analysis, the ELECTRE approach, and the cost-benefit analysis
are all important methodologies to analyze and apply to projects to help in decision-making.
 The authors advocate for a multi-criteria decision analysis (MCDA) approach, which balances
financial and non-financial dimensions to create a more robust evaluation framework.
 7. CONCLUSION

7.1 The Main Insights From The Review:

Financial Metrics Are Necessary but Insufficient:

Traditional project evaluation methodologies fail to account for subjective, intangible,

and qualitative characteristics. An investment is not solely a financial activity; it also

includes a variety of behavioral and organizational factors, as well as business

perception, all of which should be appropriately adjusted in order to invest successfully.

Importance of Non-Financial Factors

Non-financial considerations are difficult to estimate cause a subjective analysis to

project evaluators. The investment decision should include non-financial factors as well as

traditional evaluation criteria. In this way, it is important to develop a tools and method

that includes and quantifies non-financial aspects of project appraisal.

 CONTINUED…

Adoption of tools and methods: AHP, MCA, Fuzzy Decision Methodology, Financial

Appraisal Profile, ELECTRE method and Cost-benefit analysis offer a balanced

methodology by integrating financial and non-financial criteria, ensuring comprehensive

evaluation.
Risk Management: Due to the influence of risks in cash flow adjustment and discount

rate, it is important to build a framework that allows the identification and evaluation of

non-financial risks in a structured way.

 CONTINUED…

7.2 Final Thoughts On The Significance Of The Reviewed Works:

The works reviewed hold considerable significance in advancing project appraisal methodologies. Their

emphasis on broadening the scope of evaluation frameworks addresses the limitations of traditional

financial metrics and aligns with contemporary business needs. Here are the key points of significance:
A Shift toward Holistic Evaluation: The works reviewed suggest incorporating financial and non-

financial factors to evaluate projects.

Risk and Uncertainty Management: By recognizing the limitations of predictive models and

incorporating risk analysis, project appraisal becomes a more resilient tool for guiding investments,

especially in volatile conditions.

Enhancing Methodologies: The review calls attention to the evolving nature of project appraisal

methodologies. This is significant because it highlights the need for constant innovation in the tools

and techniques used to evaluate projects.

 8. RECOMMENDATION

Recommendation:

Implement MCA to balance financial and non-financial factors, ensuring a more

comprehensive evaluation of projects.

The need to address intangible aspects that are impossible to measure and result in

subjective analysis for project evaluators.

Firms need to have proper tools and methods for incorporating and quantifying all

non-financial components.
Behavioral and organizational factors, as well as business perception, should be

appropriately adjusted to ensure successful investment.

 9. REFERENCES

Comprehensive Literature Base:

37 references (Journal Articles, Empirical Research) cited from reputable
sources.
Majority publication provides the theoretical foundation for financial evaluation.
The references provided are quite useful for understanding both basic concepts and
emerging trends in project appraisal approaches. While some are more than ten
years away from publication, others are much closer. There is still room to include
even more recent works on technical breakthroughs to ensure that the references
adequately reflect current challenges and opportunities.
 END

Thank You!