The Appraisal of Capital Projects

Extract

This paper covers a field in which few actuaries have been actively engaged in the past, namely the appraisal of proposed capital projects to determine their likely profitability. In recent years this subject has received increasing attention from the accountancy profession and from operational research practitioners. Various methods of tackling the problems have been proposed, including ‘discounted cash flow’ techniques. Most of the methods used employ compound interest and some involve probability concepts; it is surprising, therefore, that actuaries have not given the subject more attention. Furthermore, actuaries concerned with the investment of funds should also be interested in the matter from another angle: the shares which will yield the greatest return to investors may well tend to be those of the companies which carry out proper financial appraisals of the ventures in which they propose to engage.