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 forces 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.

VALUE A PROJECT

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.

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This website was created in May 1999 by Alison Hirsch '01, and is maintained by Professor Satya Gabriel, of the Economics Department at Mount Holyoke College