Project Analysis

It’s important to be sure that your company’s capital spending decisions are achieving the greatest possible return.  In order to gain this assurance, each alternative must be compared to the others and to the status quo (do nothing).

Many firms are using the “payback interval” to make capital spending decisions.  The approach has the advantage of simplicity, and the results are intuitive:  “This equipment will pay for itself in 18 months.  Afterward it’s all gravy.”

Even so, Talos advocates net present value (NPV) as the best metric to use when examining potential projects.  NPV is intuitive too:  We pursue projects with a positive NPV and reject ones with a negative NPV.  It also takes into account factors that the payback method ignores:

  • The value of a dollar is not constant (time value of money)
  • There will be cash outflows (costs) beyond the payback interval
  • There will be cash inflows (benefits) beyond the payback interval

Omitting these factors from the analysis can sometimes lead to suboptimal project selections.  That is, we risk accepting projects that we should reject and rejecting projects that we should accept.

Talos’ analysts can work with you to calculate the NPV of the various project options to ensure that your company has the information it needs to optimize capital spending decisions.

In addition to NPV, our Project Analysis Reports also include several other standard metrics, including payback interval.  Each metric highlights a different aspect of each project alternative to give a more complete picture.

  • Internal Rate of Return (IRR)
  • Average Accounting Return (AAR)
  • Profitability Index (PI)

If you’d like to learn more about Talos’ project analysis services or the advantages of NPV analysis, please don’t hesitate to contact us.