The influence of extra projects on overall investment feasibility

Abstract

Purpose

The paper looks at the influence of adding more projects on overall investment feasibility under conditions of uncertainty, and how far into the future the project cash flows should be relied upon, given that the project owner expects a reasonable level of feasibility attached to the investment.

Design/methodology/approach

The paper presents a formulation for the feasibility of the multi‐project case under uncertainty. A second order moment analysis method is adopted. Existing theory is extended to take into account the presence of multiple projects with a requirement imposed on feasibility by the project owner. In tandem with the theoretical development, example case study numerical results are presented.

Findings

With a conventional deterministic discounted cash flow analysis, the feasibility calculations change little in going from one to many projects. However with uncertainty attached, the feasibility calculations need to be reworked and become more complex, the issue of feasibility becomes less transparent on going from one to many projects, distinct feasibility transition points disappear, and feasibility is found to vary over the projects' time horizons.

Practical implications

The need for the analysis given in this paper resulted from an actual investment decision. The paper formulation provides interesting insight into feasibility calculations, and will be of use to practitioners engaged in front‐end project investment risk work.

Originality/value

The paper provides original commentary on the feasibility of multiple projects and the time‐variant nature of feasibility.

Citation

Carmichael, D.G. and Balatbat, M.C.A. (2008), "The influence of extra projects on overall investment feasibility", Journal of Financial Management of Property and Construction, Vol. 13 No. 3, pp. 161-175. https://doi.org/10.1108/13664380810913403