Selection of a Project

A series of activities takes place before a fixed asset is acquired and brought to a state ready for use. For example, one might think that a new car is ready to be used straightaway, but first it has to be registered with the transport authority. Capital expenditure is therefore a process that starts with the decision to spend the money and ends with a fixed asset (such as a piece of machinery or building) ready to be used. This process is generally referred to as a capital project.

Once it has been decided to make a capital investment, several suitable projects have to be identified and evaluated, to select the one that brings the most benefits. Several quantitative methods can be used for this purpose. A simple method is to determine whether the amount of money to be invested in a project would earn at least the equivalent of the interest that could be earned if the money is left in a deposit account at a financial institution for the same period. In other words, we ask: Would the capital investment bring in at feast the same percentage return as the prevailing percentage interest on deposit accounts would at the financial institution? The other more common quantitative methods will be discussed in the next chapter.

The final selection of a project depends on which indirect quantitative factors may apply to those projects.