Although the evaluation will necessarily be based to some extent on guesswork, a comprehensive market and financial evaluation should be made at the outset. Any uncertainties increase the need for evaluation, not reduce it. 'What if' questions should be answered to test the sensitivity of the project. For example, what would the effect be on the return from the project if:

The product launch takes 6 months longer to achieve than planned?
Research and development costs are 10% higher than expected?
The working capital required is 20% greater than expected because higher stock levels become necessary and customers take longer to pay than expected?
Manufacturing costs are 2% higher than forecast during the first year?
The cost of warranty work is 5% more than forecast after the first year?
Sales are 10% lower than forecast during the first 2 years?
Selling prices have to be reduced by 3% after the first year to combat competition?

During an important and lengthy R&D project the initial evaluation should be reassessed in the light of information gained as the project progresses.

Capital-expenditure investment of a significant amount should be subjected to written evaluation. The payback period or discounted cash-flow rate of return should be calculated on the total cash flow, including:

capital expenditure
working capital
operating revenues and costs
the impact elsewhere in the group, e.g. the distribution division will have to recruit extra staff and extend the North West regional depot to handle the additional sales volume

It is desirable to set different investment returns from different categories of projects to reflect their varying risk and uncertainty. Suitable project categories may be:
cost reduction or profit improvement from existing operations
expansion of existing products in existing market segments and geographical territories
a new product launch in an existing market segment or geographical territory
a new product in a new segment or geographical territory

Clearly the inherent risk and uncertainty increases along with the degree of diversification. Whilst answering 'what if' questions is a worthwhile analysis, it does not reduce the risk of a speculative ve

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