What is investment appraisal and project funding?

Definition

Investment appraisal is the analysis done to consider the profitability of an investment over the life of an asset alongside considerations of affordability and strategic fit.

Project funding is the means by which the money required to undertake a project, programme or portfolio is secured and then made available as required. Funding for standalone projects may be via a single source or through multiple investors.

Definition from APM Body of Knowledge 7^th edition

Investment decision

Investment appraisal is an input to the investment decision which is the decision made by the sponsor and governance board that justifies the investment in a project, programme or portfolio.

It provides the rationale and justification for spending limited resources and relies on a robust investment appraisal.

Investment decisions balance a number of elements including:

• Affordability: Can the benefits be delivered within the available funds of the organisation when viewed as part of the wider portfolio of operational and change activities?
• Return on investment (ROI): Does the investment deliver a suitable return, given the forecasted capital and operational costs and benefits over the economic life of the product. Is this the best way to get a return on the investment of funds?
• Portfolio effect: Does the investment fit alongside the wider set of investments in operational and change activities?

The importance of investment appraisal

The investment appraisal and business case for the project or programme depends on attribution of benefits at the right level. The business case brings together the investment appraisal for the project, programme or portfolio, with a wider evidence-based narrative of how the investment is intended to lead to realisation of the intended qualitative and quantitative benefits.

It is normal to compare options using an investment appraisal that considers the trade-off between whole-life costs, benefits and deployment risks to determine the best value for money option.

The time taken to deliver projects can vary enormously, from weeks to many years. In addition, the time taken to realise the benefit from a project can again vary enormously. If the project is to take place over multiple years, the time value of money needs to be considered.

Project funding

Funding for projects may be via a single source or through multiple investors. The governance of the project will vary to meet the needs of the investors in the project and the life cycle option chosen.

All projects require funding in some way. In most situations, money (capital) needs to be provided in order to carry out the project. It is the business case that provides the justification for this funding. It is important when starting a project to have the necessary funds available or obtain a guarantee that they will be.

Projects can be funded internally to the organisation or externally through things like grants, loans, joint ventures or other mechanisms such as a private finance initiative (PFI) or public private partnerships (PPP). It would be wrong, if not illegal, to commence any project without appropriate funding in place.

APM Learning

The following investment appraisal resources are available on APM Learning. This is a member only resource.

• Information sheet - Investment appraisal

Find out more about APM Learning

APM Body of Knowledge 7^th edition

The APM Body of Knowledge 7^th edition is a foundational resource providing the concepts, functions and activities that make up professional project management. It reflects the developing profession, recognising project-based working at all levels, and across all sectors for influencers, decision makers, project professionals and their teams.