Project Evaluation

Project Evaluation

1. Financial Analysis

   • Free Cash Flow (FCF):
     • Cash available to all capital providers (debt and equity)
   • Equity Cash Flow (ECF)
     • Cash available exclusively to the shareholders.
   • Financial Indicators
     • Quantitative tools to measure the project's attractiveness.
       • NPV (Net Present Value)
         • Present value of net benefits. If NPV > 0, the project is viable.
       • IRR (Internal Rate of Return)
         • The discount rate that makes the NPV = 0. It represents the project's profitability.
       • B/C Ratio (Benefit-Cost Ratio)
         • Benefits divided by costs. If B/C > 1, the project is viable.
       • Hurdle Rate
         • The minimum required rate of return to accept the project (often the Weighted Average Cost of Capital - WACC).
       • PP (Payback Period)
         • The time it takes for the project to recover the initial investment.

2. Profitability

   • ROI (Return on Investment)
     • A measure of the return earned on the invested capital.
   • Time Value of Money
     • The core principle that money available today is worth more than the same amount in the future.
   • Value Creation
     • The project's ability to increase the value of the firm or equity.

3. Decision Making

   • Financial Feasibility
     • The conclusion on whether the project is financially acceptable (using NPV, IRR, etc.).
   • Risk Assessment
     • Analysis of the uncertainty and potential factors that could affect the outcomes.
   • Shareholder Value Creation
     • The ultimate goal: deciding if the project will increase the owners' wealth.