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COSTING AND PROJECT EVALUATION
6.10.9. Summary
The investment criteria discussed in this section are set out in Table 6.7, which shows the
main advantage and disadvantage of each criterion.
There is no one best criterion on which to judge an investment opportunity. A company
will develop its own methods of economic evaluation, using the techniques discussed in
this section, and will have a “target” figure of what to expect for the criterion used, based
on their experience with previous successful, and unsuccessful, projects.

Table 6.7. Investment criteria
Criterion Abbreviation Units Main advantage Main shortcoming
Investment £, $ Shows financial resources No indication of project
needed performance
Net future worth NFW £, $ Simple. When plotted as Takes no account of the
cash-flow diagram, shows time value of money
timing of investment and
income
Pay-back time years Shows how soon investment No information on later
will be recovered years
Net present worth NPW £, $ As for NFW but accounts Dependent on discount rate
for timing of cash flows used
Rate of return ROR % Measures performance of Takes no account of timing
capital of cash flows
Dependent on definition of
income (profit) and
investment
Discounted DCFRR % Measures performance of No indication of the
cash-flow rate capital allowing for resources needed
of return timing of cash flows

A figure of 20 to 30 per cent for the return on investment (ROR) can be used as a
rough guide for judging small projects, and when decisions have to be made on whether
to install additional equipment to reduce operating costs. This is equivalent to saying that
for a project to be viable the investment needed should not be greater than about 4 to 5
times the annual savings achieved.
As well as economic performance, many other factors have to be considered when
evaluating projects; such as those listed below:
1. Safety.
2. Environmental problems (waste disposal).
3. Political considerations (government policies).
4. Location of customers.
5. Availability of labour.
6. Availability of supporting services.
7. Company experience in the particular technology.

Example 6.5

A plant is producing 10,000 t/y of a product. The overall yield is 70 per cent, on a mass
basis (kg of product per kg raw material). The raw material costs £10/t, and the product