Will it pay off?
How do you assess the financial viability of the proposed project? I am about to walk you step by step through the decision process, starting with the initial forecasting. Before I do, let me mention two yardsticks which are sometimes used – payback and return on investment (ROI). These are simple, but inaccurate. We will go on to discuss better measures later in this chapter.
It is common to hear executives talk about payback – the amount of money that a project pays out and the speed with which it happens. This project pays back 10,000 in 12 months. By itself, this is not a very useful statement. However, a company with cash flow problems might become concerned primarily with making a fast return. This is one situation ...