Corporate Finance Basics
Why Value a Project?
In order for a corporation to be successful in
the long run, the managers must implement its goals and objectives
through investing in long term projects. These projects may be as simple
as upgrading equipment, or as complex as a new product or service
that enters the corporation into an
entirely new market. Before most investment decisions are made, the
investors must weigh the benefits of the project to its risk. The
way in which to do this is
to value the investment. Since firms invest to add value to
the corporation, careful analysis of the proposed project should be done
before hand to determine its likeliness to add value.
A corporation must develop a strategy for selecting potential projects.
Managers must ask questions such as, "If this is a genuine opportunity,
why is there not greater competition in this market?" or "Are market
already at work to increase competition?" (Foundations of Corporate
Finance 282) The strategy that the corporation decides on should
determine where it looks for opportunities in the market. Finally,
before a valuation can be done, the project's
importance should be determined so that the corporation's resources can be
directed to the most important.
There are certain times, however, when a project
valuation does not need to be completed. Whenever the corporation
must complete the project in order to stay in business, there is no need
to do a valuation. Examples include projects to meet a
government regulation or replacement of depreciated
equipment. A timely example is companys' adjusting their computer programs
for the Y2K problem. As they must
complete the project if they do not want to have the problem within their
system, there is no need to valuate this type of project.