A Few Strategic & Analytical Questions Businesses Must Ask-
When evaluating projects through capital budgeting methods like NPV (Net Present Value) and IRR (Internal Rate of Return), businesses need to ask strategic and analytical questions to ensure sound investment decisions. Here are the critical categories and associated questions:
1. Strategic Alignment
- Does this project align with the company’s long-term goals and vision?
- How does this investment contribute to competitive advantage or market expansion?
- What are the opportunity costs of investing in this project versus alternatives?
2. Financial Viability
Net Present Value (NPV):
- Is the project’s NPV positive, indicating value creation?
- How sensitive is the NPV to changes in key assumptions (e.g., discount rate, cash flow projections)?
3. Internal Rate of Return (IRR):
- Is the IRR higher than the company’s cost of capital, required rate of return, or the hurdle rate
- How does the IRR compare to other investment opportunities?
3. Risk Assessment
- What are the key risks associated with this project (e.g., market, operational, financial)?
- How will variations in cash flows (revenue, costs, etc.) impact the project’s profitability?
- Is there a robust contingency plan in case of adverse outcomes?
- What is the project’s **payback period**, and is it acceptable for the company’s risk tolerance?
4. Cash Flow Projections
- Are the cash flow estimates realistic, and what assumptions are they based on?
- Are there any hidden costs or potential cost overruns?
- How soon will the project generate positive cash flows?
5. Funding and Financing
- What is the source of funding (internal cash, debt, equity)?
- How will the project impact the company’s overall financial position and leverage?
- Are there alternative, more cost-effective ways to finance the project?
6. Alternatives and Opportunity Cost
- Are there better opportunities where resources could be allocated?
- What are the expected returns of this project compared to other available projects?
7. Terminal Value and Exit Strategy
- What is the estimated terminal value (if applicable) at the end of the project’s life?
- Is there an exit strategy in case the project underperforms?
8. Sensitivity and Scenario Analysis
- How would changes in economic conditions (e.g., inflation, interest rates) affect the project’s feasibility?
- Have sensitivity or scenario analyses been conducted to test key assumptions?
9. Post-Implementation
- What are the expected metrics for success post-implementation (e.g., ROI, market share growth)?
- How will the performance of the project be monitored over time?
Answering these questions thoroughly helps businesses make informed decisions, reduce risks, and optimize resource allocation.
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