Appendix 1: The Accounting Rate

of Return1

The ARR method of capital investment appraisal appears to go under a

number of guises, with a multitude of definitions used as the basis for its
calculation. There is no single accepted formula for the accounting rate
of return (ARR), and there is considerable confusion in the academic and
the professional literature as to which method of calculation should be
adopted. As a result, management may select whichever formula suits
them best.
Reference is made to the ARR without giving a precise definition to
its calculation or meaning. Comparisons are made on the basic assump-
tion that one is comparing like with like. This, in many cases, is a false
assumption. Although, in some cases, a distinction is made between
the ARR based on initial investment and average investment, there is no
generally accepted basis of calculating the figures to be used for either
investment in or the return arriving from a project.
The accounting rate of return (ARR) is also commonly referred to as
average rate of return (ARR), return on investment (ROI), and return on
capital employed (ROCE). It is also known as average book rate of return,
return on book value, book rate of return, unadjusted rate of return, and
simple rate of return. In many cases the terms are used synonymously,
while in others, they imply subtle differences in calculation.
Although the ARR, in whatever format, suffers from serious deficien-
cies (it is based on an accrual and not a cashflow concept; it does not
take fully into account the fact that profits may vary year by year and
therefore show an uneven pattern; it ignores the time value of the flow
of funds and is not suitable for comparing projects with different life
spans), research shows that it continues to be used in the United King-
dom and the United States for the appraisal of capital projects. Reasons

182
 Appendix 1: The Accounting Rate of Return 183

for its use have been given as simplicity and ease of calculation, readily
understandability, and its use of accrual accounting measures by which
managers are frequently appraised and rewarded. It does, however, offer
a potential for manipulation by creative accounting.
Under the ‘initial’ method, the returns from a project are expressed
as a percentage of the initial cost (hence the term ‘initial’). The returns
are stated after depreciation, so this shows in effect, in a simplistic way,
the rate of return that is expected to be achieved above that which is
required to recover the initial cost of the investment. There is, however,
a school of thought that advances the proposition that as the capital
investment will be written-off over the useful life of the project, then
the figure for investment should take this into account. In its most basic
form, this would result in an ‘average’ investment figure of one-half of
the original cost. The earnings from the project would remain the same
under either approach.
There appears to be two further areas of confusion with regard to the
calculation of the ARR: how to deal with (i) scrap/salvage values and
(ii) different methods of depreciation. Some textbooks show examples
that do not include scrap values, thus getting round the problem of
what to do with them, and with regards to depreciation, restrict the cal-
culations to straight-line depreciation. This gives the reader of such texts
a general impression of incompleteness, in that he/she is left wondering
what to do if there is any scrap value from a project or if the organisa-
tion uses a different method of depreciation other than the straight-line
method.

Suggestion

We would suggest that the accounting rate of return (ARR) used in the
evaluation of capital projects should be based on either the initial (with
the abbreviation, ARRi ) or average (ARRa ) investment method.
The term ‘accounting’ relates to the concept by which the determi-
nation of the actual figures for income and investment are arrived at.
The figure for income should be calculated following the conventional
accounting concepts for profit. In this case, income is synonymous with
profit. Net income should be after depreciation. By using the following
formula, it is immaterial which method of depreciation is used, as the
average income will always be total gross income less total depreciation
divided by the life (in years) of the project. Total depreciation will be
equal to the capital cost of the project less any scrap value. Investment
under the ‘initial’ method will be the capital cost of the project less any
184 The Application of the FAP Model to ICT projects

scrap value, while under the ‘average’ method, it will be the capital cost
of the project plus any scrap value divided by 2.

Total gross income – Total depreciation

Average income =
Life of project

Investment:
(1) ‘Initial’ investment = Capital cost of project less scrap value.
(2) ‘Average’ investment = (Capital cost of project plus scrap value)/2

Average income × 100

ARRi =
Initial investment
Average income × 100
ARRa =
Average investment

Once the ARR has been calculated, the figure is compared with a pre-
determined hurdle rate to see if the project is ‘acceptable’. If the ARR is
greater than the hurdle rate, then the project has satisfied this particular
financial criterion of investment appraisal.

Our favoured approach to the calculation of ARR

In our opinion, it seems unnecessary to refine the calculations any fur-

ther. After all, the figures for both investment and income are based on
management estimates and are therefore susceptible to errors. Much of
the confusion would also disappear if the term ‘ARR’ (ARRi and ARRa )
was restricted to capital investment appraisal, and ROI and ROCE are
treated as post-investment ‘performance measures’.
ROI, which appears to be more widely used in the United States than
in the United Kingdom, should be applied to the appraisal of ‘perfor-
mance’ and calculated on an annual basis, based on the net book value
of the investment at the beginning of each year.
Because of the difficulty and information cost in determining the
actual ‘profit’ from each individual investment made by an organisa-
tion, it may be more appropriate to calculate the ROI on a profit centre
basis.
The ROCE is more appropriate in measuring divisional performance,
rather than as a tool for the initial evaluation of capital projects. It differs
from both the ARR and ROI, in that it includes ‘working capital’ as part
of the investment figure, and from the ARR in that it is calculated on an
annual basis and does not therefore show, as a single figure, the overall
return from a project.
 Appendix 1: The Accounting Rate of Return 185

The ROCE is the ratio of accounting profit to capital employed

expressed as a percentage. Accounting profit is arrived at after taking
into account depreciation, while capital employed is the capital cost of
the investment plus additional working capital required as a result of
the project less accumulated depreciation.
Although the ROI and ROCE are post-investment performance mea-
sures, it is understandable that managers may wish to know how
these measures will be influenced by accepting a particular investment
project. After all, their own performance will, in many cases, be judged
using one of these performance measurements, and they will, invariably,
be rewarded accordingly.
It is therefore not surprising that managers may wish to calculate such
figures when appraising capital projects. What must be remembered,
however, is that the ROI and ROCE calculate the annual return from an
investment or group of investments, and it is the returns ‘profile’ that
will be of interest to management. Selecting projects with different profit
profiles will influence the total annual profit from all investments. The
profit profile will not only be influenced by the pattern of gross income
from investments but also by the method of depreciation adopted by
the organisation.
It can be seen that by adopting the reducing-balance method of depre-
ciation, this has the effect of showing lower profits in the early years and
higher profits in later years, while the straight-line method of deprecia-
tion charges the same amount to costs in each year.2 The ROI and ROCE
should not be the driving force behind project selection, as such tech-
niques may be biased towards managerial benefits and short-termism
rather than corporate long-term profitability.
All other ‘terms’ for ARR should be ignored and left out of future
textbooks, as they only breed confusion in the minds of both students
and practitioners. This is, perhaps, a ‘back to basics’ approach, but one
which, in our opinion, would eliminate much of the mystique and con-
fusion over the ARR. It must be remembered that the ARR is a basic,
simplistic investment appraisal tool. So why try and make it into some-
thing that it will never be – a substitute for the more sophisticated DCF
methods?
This is not to say that the ARR has no place in the appraisal of capital
investments, for any information is useful. Its use, however, must be
made in the right context, and its limitations must be made known to
the decision-makers. As part of a set of investment tools, the ARR can
provide information that will give a wider perspective to the appraisal of
capital projects. But the technique should not be used as the sole criteria
for selection, or confused with the ROI or ROCE.
186 The Application of the FAP Model to ICT projects

Example

The following example will illustrate the detailed workings of the ARRi ,
ARRa , ROI, and ROCE.3 A company is considering the investment in a
project, the financial details of which are:

Capital cost of project (cost of plant and installation): £51,435

Additional working capital required to finance stock and debtors:
£4,565
Estimated useful life of project: 5 years.
Scrap value of plant less cost of removing from site: £4,000
Depreciation method used by organisation: 40% on reducing balance.
Gross income from project: year 1: £20,000; year 2: £25,000; year 3:
£20,000; year 4: £15,000; year 5: £7,000.

Calculation of the accounting rate of return

Average net income = (£87, 000−£47, 435)/5 = £7, 913

Investment (initial method) = £51, 435−£4, 000 = £47, 435
Investment (average method) = (£51, 435+£4, 000)/2 = £27, 718
ARRi = (£7, 913/£47, 435) × 100 = 16. 68%
ARRa = (£7, 913/£27, 718) × 100 = 28. 55%

Calculation of the ROI and ROCE

As the ROI and ROCE are annual performance measures, the second year
of the project has been selected for the purpose of illustration (it could
equally have been any of the other years of the project). As both these
methods show the return for a particular year, and not for the project as
a whole, the calculations will be influenced by the depreciation method
used by the organisation.

ROI for year 2

Net Income for year 2 = £25, 000 less £12, 344 (second-year depreciation)
= £12, 656
Investment figure = £30, 861 (book value at beginning of second year)
ROI = (£12, 656/£30, 861) × 100
ROI for year 2 = 41. 01%
 Appendix 1: The Accounting Rate of Return 187

ROCE for year 2

Net Income for year 2 = £12, 656 (same as ROI)

Investment figure = £30, 861 + £4, 565 (working capital increase)
ROCE = (£12, 656/£35, 426) × 100
ROCE for year 2 = 35. 73%
Appendix 2: Calculating the
Modified Internal Rate of Return
from the Net Present Value

The two principal discounted cashflow models of capital investment

appraisal – the net present value (NPV) and the internal rate of return
(IRR) have traditionally been in direct competition, with academics
favouring the NPV and practitioners favouring the IRR. These two mod-
els have intrinsic differences from each other, with the NPV being
an economic indicator and the IRR a financial indicator of a capital
investment.1 Textbooks show the two approaches being calculated inde-
pendently of each other, although the same cashflows are used in each
case. To overcome some of the perceived problems of the IRR, a modi-
fied internal rate of return (MIRR) was developed. This appendix shows
a simplified way of calculating a project’s MIRR through the net present
value profile (NPVP), giving a clear link between the NPV and MIRR.
In its basic form, the NPV of a project is the sum of all the net dis-
counted cashflows during the life of the project less the present value
of the capital cost of the project. A positive NPV indicates that if the
project is accepted, then the organisation’s wealth will increase by this
NPV. If the NPV is negative, then the result will be a reduction in an
organisation’s net worth, while a zero NPV will result in no change.
The IRR model (which is also referred to as the actuarial, the marginal
efficiency of capital, and the yield model) uses the same net cashflows
as the NPV model but expresses the end-result as a percentage yield.
Provided this percentage yield is greater than the organisation’s cost
of finance/hurdle rate, then the project is said to be acceptable from
a financial point of view. The IRR for a project is therefore the dis-
count rate, which reduces the stream of net returns from the project
to a present value of zero.
There are, however, two main problems with the IRR, (i) the possibility
of arriving at multiple rates, and (ii) concerns over the reinvestment

188
 Calculating the MIRR from the NPV 189

rate.2 Both these problems have been overcome by modifying the IRR
model to arrive at what is generally known as an MIRR.3
Under the conventional IRR model, a rate of return is calculated
which equates the discounted net cash outflows with the net cash
inflows, a situation where the NPV is equal to zero. The most com-
mon form of MIRR,4 however, compounds the net cash inflows to a
single figure at the end of a project’s economic life. Then, using the
cost of the project as a base figure, calculate the modified return for a
project using the following formula, [(compounded cash inflows/cost of
project)1/n − 1] × 100, where ‘n’ is the length of the project. This gives
the compound interest rate which when applied to the base cost of the
project produces the compounded net cash inflow figure at the end of
the life of the project. As the ‘inflow’ in the final year has been arrived
at by assuming a reinvestment rate equal to the cost of capital and not
at the project’s IRR, then the MIRR will usually (i.e. where the IRR is
greater than the costs of capital) produce a figure that will be lower than
the IRR. The figure produced, however, is arguably more ‘realistic’ and
therefore more meaningful than the conventional IRR. The MIRR will, in
all cases, provide a compatible accept/reject decision with the NPV rule,
where ‘accept’ is when the NPV > 0 and the MIRR > Cost of Capital.
Until recently, both the NPV and MIRR, although using the same cash-
flows, have been arrived at independently. What this appendix shows is
that the MIRR can be calculated from the NPV through a project’s NPVP.
The NPVP extends the NPV by incorporating the discounted payback
(DPB), the discounted payback index (DPBI), and the marginal growth
rate (MGR), into a financial profile of an investment opportunity. The
NPVP shows a natural progression from NPV to MGR from which the
MIRR can be calculated.

The net present value profile

NPV ⇒ DPB ⇒ DPBI ⇒ MGR ⇒ MIRR

Calculating the MIRR from the NPVP

In our simplified example (Table A2.1), we look at a project which has

a capital cost of £175,000 and an estimated useful life of ten years. The
scrap value of the equipment, estimated at £7,500, is taken into account
in the final year of the project by increasing the net cash inflow for
that year. The company’s cost of capital is 8%. For simplicity, the figures
in our example ignore taxation and inflation, and the scrap value is
included within the cash inflow figure for year 10. From this data it can
190 The Application of the FAP Model to ICT Projects

Table A2.1 Calculating the MIRR from the NPV

Capital cost of project £175,000

Year Net cash inflows from the project

Net cash Discount PV of net cash Cumulative

inflow (£) factor 8% inflows (£) PVs (£)

1 52,000 0.926 48,152 48,152

2 57,000 0.857 48,849 97,001
3 60,000 0.794 47,640 144,641
4 60,000 0.735 44,100 188,741
5 60,000 0.681 40,860 229,601
6 60,000 0.630 37,800 267,401
7 60,000 0.583 34,980 302,381
8 60,000 0.540 32,400 334,781
9 60,000 0.500 30,000 364,781
10 27,500 0.463 12,733 377,514
Totals 556,500 377,514

Calculations:
NPV: (Present value of net cash inflows – capital cost of project) = (£377,514 –
£175,000) = £202,514.
DPB = [3 + (30359/44100)] = 3.69 years.
DPBI = (Present value of net cash inflows/capital cost of project) = (£377,514/
£175,000) = 2.1572.
MGR = [(DPBI)1/n − 1] × 100 = [(2. 1572)1/10 − 1] × 100 = 7. 99%.
MIRR = [(1 + 0. 0799) × (1 + 0. 08) = (1. 0799 × 1. 08) = 1. 1663. MIRR = (1. 1663 − 1) × 100] =
16. 63%.

be seen that, with a capital cost of £175,000 and a total discounted net
cash inflow of £377,514, the project has a positive NPV of £202,514.
This is the gain in present value terms that the company can expect to
achieve if it accepts the project – it is the discounted return in excess of
the capital cost of the project.
The DPB calculates what may be described as the break-even point at
which the discounted returns from a project are equal to the capital cost
of the project. It shows the time that it will take to recover the initial
cost of the project after taking into account the cost of capital. It is supe-
rior to the conventional payback approach, as it takes into account the
future value of money. As the cashflows from a project are discounted,
the DPB will always show a longer payback period than the standard
payback model and may therefore be regarded as more conservative.
In our example, the DPB is calculated as follows: The cumulative
discounted net cash inflow at the end of year 3 is £144,641, which shows
 Calculating the MIRR from the NPV 191

a payback period greater than three years. The company then needs
to achieve a further discounted net cash inflow of £30,359 (£175,000–
£144,641) to arrive at the actual discounted payback period. As the
discounted net cash inflow during year 4 is £44,100, which is greater
than that required to break-even, the additional payback period is
30,359/44,100 (0.69), giving a total payback period of three years plus
0.69 = 3.69 years (this assumes a linear increase in net cash inflows dur-
ing the year, if this is not the case and a more accurate figure is required,
then actual monthly net cashflows may be used). The company will
therefore be placed back in its original financial position in just over
three and a half years, having recovered the whole of the cost and
financing of the project in that time.
A natural progression from the DPB is the calculation of the DPBI,
which is similar to the profitability index. The DPBI is calculated by
dividing a project’s initial capital cost into its accumulated discounted
net cash inflows. This index shows how many times the initial cost of an
investment will be recovered during a project’s useful life and is there-
fore a further measure of a project’s profitability. The higher the index,
the more profitable will be the project in relation to its capital cost.
A DPBI of 1.0 will show that the project will only recover the capital
cost of an investment once, while a DPBI of 3.0 shows that the initial
cost will be recovered three times.
A weakness of the payback model (whether conventional or dis-
counted) is the fact that it ignores the cashflows after the payback
period. By highlighting the DPBI, this weakness is eradicated because
the total cashflows from a project are now taken into account. In our
example, the DPBI can be calculated by dividing the capital cost of the
project into the present value of net cash inflows (£377,514/£175,000),
which gives a figure of 2.1572. This means that the project recovers just
over twice its original cost.
The final stage in the progression of the NPVP is the calculation of the
MGR which is reached through the DPBI, where MGR = [(DPBI)1/n − 1] ×
100. The MGR is the marginal return on a project after discounting the
cash inflows at the cost of capital and can be viewed as a ‘net’ variant
of the MIRR. To validate the meaning of the MGR, it can be seen that
applying a compound interest rate equal to the MGR to the initial cost
of a project will produce, in the lifespan of that project, a value equal
to the present value of the project’s net cash inflows. This is therefore
the growth rate that, when applied to the capital cost of the project, will
produce the NPV of the project. Unlike the DPBI, the MGR reflects the
economic life of a project. Although the DPBI of two projects may be
192 The Application of the FAP Model to ICT Projects

Table A2.2 Traditional method of calculating the MIRR

Capital cost of project £175,000

Year Net cash inflows from the project

Net cash inflow (£) Reinvestment rate 8% Value (£)

1 52,000 1.999 103,948

2 57,000 1.851 105,507
3 60,000 1.714 102,840
4 60,000 1.587 95,220
5 60,000 1.469 88,140
6 60,000 1.361 81,660
7 60,000 1.260 75,600
8 60,000 1.166 69,960
9 60,000 1.080 64,800
10 27,500 1.000 27,500
Totals 556,500 815,175

The MIRR of the project (based on a cash outflow of £175,000 in year 0 and a single cash
inflow in year 10 of £815, 175 = 16. 63% {[(compounded cash inflows/cost of project)1/n −
1] × 100 = [(£815, 175/£175, 000)1/10 − 1] × 100 = 16. 63%}.

identical, if these projects have different economic lives, the MGR will
be lower for the longer life project. In our example, the MGR is 7.99%
{[(DPBI)1/n − 1] × 100 = [(2. 1572)1/10 − 1] × 100} and is a measure of the
project’s rate of net return.
The mathematical ‘relationship’ between the MGR and the most
commonly used MIRR is (1 + MIRR) = (1 + MGR) × (1 + cost of capital).
The MIRR for the above example is 16.63% [(1 + 0. 0799) × (1 +
0. 08) = (1. 0799 × 1. 08) = 1. 1663. MIRR = (1. 1663 − 1) × 100 = 16. 63%].
Table A2.2 shows the traditional method of calculating the MIRR of the
project and confirms the figure calculated using the NPVP approach.
Through adopting the NPVP approach, we have demonstrated a way
of calculating the MIRR from the NPV of a project, which should in
future become the standard way of determining a project’s MIRR.
Notes

1 Introduction
1. Lefley, F., 1997. Capital investments: The ‘Financial appraisal profile’. Cer-
tified Accountant, June, 89 (6), 26–29; Lefley, F., and Morgan, M., 1998.
A new pragmatic approach to capital investment appraisal: The financial
appraisal profile (FAP) model. International Journal of Production Economics,
55 (3), 321–341; Lefley, F., 2003, The development of the financial appraisal
profile (FAP) model and its application in the evaluation of capital projects, PhD
thesis, University of London.
2. See, for example, Cotton, W. D. J., and Schinski, M., 1999, Justifying capi-
tal expenditures in new technology: A survey. Engineering Economist, 44 (4),
362–376.
3. Pike, R. H., 1985, Disenchantment with DCF promotes IRR. Certified Accoun-
tant, July, 14–17.
4. Small M. H., and Chen, I. J., 1997, Economic and strategic justification of
AMT: Inferences from industrial practices. International Journal of Production
Economics, 49 (1), 65–75.
5. It is generally accepted that sophisticated financial appraisal techniques are
those that consider the discounted net cashflows from a project and make
adjustments for, or take into account, project risk. Unsophisticated (naive)
models are generally taken as those techniques that do not consider DCF or
incorporate risk in any systematic manner, that is, PB and ARR.
6. See, for example, Pike, R. H., 1984, Sophisticated capital budgeting systems
and their association with corporate performance. Managerial and Decision
Economics, 5 (2), 91–97; Pike, R. H., 1989, Do sophisticated capital budgeting
approaches improve investment decision-making effectiveness? Engineering
Economist, 34 (2), Winter, 149–161.
7. Small, M. H., and Chen, I. J., 1997, Economic and strategic justification of
AMT: Inferences from industrial practices. International Journal of Production
Economics, 49 (1), 65–75.
8. See, for example, Lefley, F., and Sarkis, J., 1997. Short-termism and the
appraisal of AMT capital projects in the US and UK. International Journal of
Production Research, 35 (2), 341–368.
9. See, for example, Woods, M., Pokorny M., Lintner V., and Blinkhorn, M.,
1985, Appraising investment in new technology. Management Accounting, 63
(9), 42–43.
10. See, for example, Small, M. H., and Chen, I. J., 1997, Economic and strate-
gic justification of AMT: Inferences from industrial practices. International
Journal of Production Economics, 49 (1), 65–75.
11. For a detailed meaning of how we define ‘complex’, we refer the reader to
the next chapter of this book.
12. Lefley, F., 1996, The payback method of investment appraisal: A review and
synthesis. International Journal of Production Economics, 44 (3), 207–224.

193
194 Notes

13. See, for example, Keef, S., and Olowo-Okere, E., 1998, Modified internal rate
of return: A pitfall to avoid at any cost! Management Accounting, 76 (1), 50–51.
14. The uncertainty of estimating future cashflows increases with time; the
longer the project’s life, the greater the difficulty in estimating cashflows
in the later years. This uncertainty in itself creates a risk that the ultimate
benefits expected from a project may not materialise.
15. Lefley, F., and Sarkis, J., 1997. Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
16. See, for example, Lefley, F., and Sarkis, J., 1997. Short-termism and the
appraisal of AMT capital projects in the US and UK. International Journal of
Production Research, 35 (2), 341–368, and Dangerfield, B., Merk, L. H., and
Narayanaswamy, C. R., 1999, Estimating the cost of equity: Current prac-
tices and future trends in the electric utility industry. Engineering Economist,
44 (4), 377–387.
17. Mohanty, R. P., and Deshmukh, S. G., 1998, Advanced manufacturing tech-
nology selection: A strategic model for learning and evaluation. International
Journal of Production Economics, 55 (3), 295–307.
18. Lefley, F., 1996, Strategic methodologies of investment appraisal of AMT
projects: A review and synthesis. Engineering Economist, 41 (4), 345–363.
19. See, for example, Kaplan, R. S., 1986, Must CIM be justified by faith alone?
Harvard Business Review, 64 (2), March/April, 87–95.
20. Fredrickson, J. W., 1985, Effects of decision motive and organizational perfor-
mance level on strategic decision processes. Academy of Management Journal,
28 (4), 821–843. Fredrickson was also drawing on Pondy’s assertion, ‘that
executives do best when they combine rational, analytic techniques and
intuition’ (Pondy, L. R., 1983, Union of rationality and intuition in man-
agement action, in S. Srivastva and associates (Eds.), The Executive Mind (San
Francisco: Jossey-Bass). 169–191.).
21. Hyde, W. D., 1986, How small groups can solve problems and reduce costs.
Industrial Engineering, 18 (12), 42–49.
22. Fredrickson, J. W., 1985, Effects of decision motive and organizational perfor-
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28 (4), 821–843.
23. Sarkis, J., and Liles, D. H., 1995, Using IDEF and QFD to develop an orga-
nizational decision support methodology for the strategic justification of
computer-integrated technologies. International Journal of Project Manage-
ment, 13 (3), 177–185.
24. EVATM is a trademark of the Stern Stewart Corporation.
25. Stewart III, G. B., 1994, EVATM : Fact and fantasy. Journal of Applied Corporate
Finance, 7 (2), Summer, 71–84.
26. Kaplan, R. S., and Norton, D. P., 1996, The Balanced Scorecard (Boston:
Harvard Business School).
27. Madu, C. N., Kuei, C-H., and Madu, A. N., 1991, Setting priorities for the
IT industry in Taiwan – A Delphi study. Long Range Planning, 24 (5), 105–118.
28. Merkhofer, M. W., 1987, Quantifying judgmental uncertainty: Methodology,
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17 (5), 741–752.
 Notes 195

29. The Delphi technique (from ‘Project DELPHI’, named from the Oracle at
Delphi in Ancient Greece) was developed by Olaf Helmer, Nicholas Rescher,
and colleagues at the RAND Corporation, Santa Monica, California, USA, in
the early 1950s to elicit opinions from a group of experts regarding urgent
defence problems (Helmer, O., and Rescher, N., 1959, On the epistemology
of the inexact sciences. Management Science, 6 (1), 25–52).
30. Brooks, K. W., 1979, Delphi technique: Expanding applications. The North
Central Association Quarterly, 53, 377–385.
31. Salancik, J. R., Wenger, W., and Helfer, E., 1971, The construction of Delphi
event statements. Technological Forecasting and Social Change, 3, 65–73.
32. Rauch, W., 1979, The decision Delphi. Technology Forecasting and Social
Change, 15 (3), 159–169.
33. See, for example, Saaty, T. L., 1986, Axiomatic foundation of the analytic
hierarchy process. Management Science, 32 (7), 841–855, and Mohanty, R. P.,
and Deshmukh, S. G., 1998, Advanced manufacturing technology selec-
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2 The Perception that ICT Projects Are Different

1. Heemstra, F. J. and Kusters. R. J., 2004, Defining ICT proposals. Journal of
Enterprise Information Management, 17 (4), 258–268; Milis, K. and Mereken,
R., 2004, The use of the balanced scorecard for the evaluation of informa-
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196 Notes

7. Lefley, F., 2013, Information communication technology (ICT) projects, are

they different? Operations Management, 39 (1), 31–36. This chapter is taken
from the following publication, Hynek, J., Janeček, V., Lefley, F., Půžová, K.
and Němeček, J., 2014, An exploratory study investigating the perception
that ICT capital projects are different? Evidence from the Czech Republic.
Management Research Review, 37 (10), 912–927.
8. Anandarajan, A. and Wen, H. J., 1999, Evaluation of information technology
investment. Management Decision, 37 (4), 329–337.
9. Heemstra, F. J. and Kusters. R. J., 2004, Defining ICT proposals. Journal of
Enterprise Information Management, 17 (4), 258–268.
10. Heemstra, F. J. and Kusters. R. J., 2004, Defining ICT proposals. Journal of
Enterprise Information Management, 17 (4), 258–268.
11. Lefley, F. and Morgan, M., 1998, A new pragmatic approach to capital invest-
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 Notes 197

Gunasekaran, A., Love, P. E. D. Rahimi, F. and Miele, R., 2001, A model

for investment justification in information technology projects. Interna-
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investment. Management Decision, 37 (4), 329–337; Milis, K. and Mereken, R.,
2004, The use of the balanced scorecard for the evaluation of information
and communication technology projects. International Journal of Project Man-
agement, 22 (2), 87–97; Lefley, F., 2008, Research in applying the financial
appraisal profile (FAP) model to an information communication technology
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Information Technology, 7 (2), 100–108.
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198 Notes

M. J., 1993, Experiences in strategic information systems planning: Edi-

tors comment. MIS Quarterly, 17 (1), 1–14; Sethi, V. and King, W. R., 1994,
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36. Farbey, B., Land, F. and Targett, D., 1999, Moving IS evaluation forward:
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40. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT cap-
ital projects in the US and UK. International Journal of Production Research,
35 (2), 341–368; Ho, S. S. M. and Pike, R. H., 1998, Organisational charac-
teristics influencing the use of risk analysis in strategic capital investments.
Engineering Economist, 43 (3), 247–268.
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 Notes 199

43. Apostolopoulos, T. K. and Pramataris, K. C., 1997, Information technology

investment evaluation: Investment in telecommunication infrastructure.
International Journal of Information Management, 17 (4), 289.
44. Anandarajan, A. and Wen, H. J., 1999, Evaluation of information technology
investment. Management Decision, 37 (4), 329–337.
45. Ward, J., Taylor, P. and Bond, P., 1996, Evaluation and realisation of IS/IT ben-
efits: An empirical study of current practices. European Journal of Information
Systems, 4 (4), 214–225.
46. Anandarajan, A. and Wen, H. J., 1999, Evaluation of information technology
investment. Management Decision, 37 (4), 336.
47. Earl, M. J., 1992, Putting IT in its place: A polemic for the nineties. Journal of
Information Technology, 7 (2), 100–108.
48. Lefley, F., Wharton, F., Hajek, L., Hynek, J. and Janecek, V., 2004, Manu-
facturing investment in the Czech Republic: An international comparison.
International Journal of Production Economics, 88 (1), 1–4.
49. Gunasekaran, A., Love, P. E. D., Rahimi, F. and Miele, R., 2001, A model
for investment justification in information technology projects. International
Journal of Information Management, 21 (5), 349–364.
50. Lefley, F., Wharton, F., Hajek, L., Hynek, J. and Janecek, V., 2004, Manu-
facturing investment in the Czech Republic: An international comparison.
International Journal of Production Economics, 88 (1), 1–4.
51. See, for example, Ballantine, J. and Stray, S., 1999, Information systems
and other capital investments: Evaluation practices compared. Logistics
Information Management, 12 (1/2), 78–93.
52. Gunasekaran, A., Love, P. E. D. Rahimi, F. and Miele, R., 2001, A model
for investment justification in information technology projects. International
Journal of Information Management, 21 (5), 349–364.
53. Lefley, F., 1996a, The PB method of investment appraisal: A review and
synthesis. International Journal of Production Economics, 44 (3), 207–224.
54. Lefley, F., 1996b, Strategic methodologies of investment appraisal of AMT
projects: A review and synthesis. Engineering Economist, 41 (4), 345–363.
55. Ives, B. and Jarvenpaa, S. L., 1991, Applications of global information tech-
nology key issues for management. MIS Quarterly, 15 (1), 33–49; Earl, M. J.,
1993, Experiences in strategic information systems planning: Editors com-
ment. MIS Quarterly, 17 (1), 1–14; Gunasekaran, A., Love, P. E. D., Rahimi,
F. and Miele, R., 2001, A model for investment justification in information
technology projects. International Journal of Information Management, 21 (5),
349–364; Lefley, F., 2008, Research in applying the financial appraisal profile
(FAP) model to an information communication technology project within a
professional association. International Journal of Managing Projects in Business,
1 (2), 233–259.
56. Anandarajan, A. and Wen, H. J., 1999, Evaluation of information technology
investment. Management Decision, 37 (4), 329–337.
57. Gunasekaran, A., Love, P. E. D., Rahimi, F. and Miele, R., 2001, A model
for investment justification in information technology projects. International
Journal of Information Management, 21 (5), 349–364.
58. Ballantine, J. and Stray, S., 1999, Information systems and other capital
investments: Evaluation practices compared. Logistics Information Manage-
ment, 12 (1/2), 78–93.
200 Notes

3 The Appraisal of ICT and Non-ICT Projects: A Study of

Practices of Large UK Organisations
1. Doherty, N. F., Ashurst, C., and Peppard, J., 2012, Factors affecting the
successful realisation of benefits from systems development projects: Find-
ings from three case studies. Journal of Information Technology, 27 (1), 1–16;
Gunasekaran, A., Love, P. E. D., Rahimi, F., and Miele, R., 2001, A model
for investment justification in information technology projects. International
Journal of Information Management, 21 (5), 349–364; Apostolopoulos, T. K.,
and Pramataris, K. C., 1997, Information technology investment evalua-
tion: Investments in telecommunication infrastructure. International Journal
of Information Management, 17 (4), 287–296.
2. Lefley, F., 2008, Research in applying the financial appraisal profile FAP
model to an information communication technology project within a pro-
fessional association. International Journal of Managing Projects in Business,
1 (2), 233–259, see also Chapter 11; Peacock, E., and Tanniru, M., 2005,
Activity-based justification of IT investments. Information and Management,
42 (3), 415–424.
3. Ballantine, J., and Stray, S., 1998, Financial appraisal and the IS/IT invest-
ment decision making process. Journal of Information Technology, 13 (1),
3–14.
4. Lefley, F., 2008, Research in applying the financial appraisal profile FAP
model to an information communication technology project within a pro-
fessional association. International Journal of Managing Projects in Business, 1
(2), 233–259; Heemstra, F. J., and Kusters, R. J., 2004, Defining ICT proposals.
Journal of Enterprise Information Management, 17 (4), 258–268; Anandarajan,
A., and Wen, H. J., 1999, Evaluation of information technology invest-
ment. Management Decision, 37 (4), 329–337; Small, M. H., and Chen, I. J.,
1997, Economic and strategic justification of AMT: Inferences from industrial
practices. International Journal of Production Economics, 49 (1), 65–75.
5. Graham, J. R., and Harvey, C. R., 2001, The theory and practice of corpo-
rate finance: Evidence from the field. Journal of Financial Economics, 60 (2–3),
187–243.
6. Serafeimidis, V., and Smithson, S., 2000, Information systems evaluation
in practice: A case study of organizational change. Journal of Information
Technology, 15 (2), 93–105.
7. Oxford Economics, 2011, Capturing the ICT dividend: Using technology to
drive productivity and growth in the EU, September, White Paper.
8. Gunasekaran, A., Love, P. E. D., Rahimi, F., and Miele, R., 2001, A model
for investment justification in information technology projects. International
Journal of Information Management, 21 (5), 349–364.
9. Oxford Economics, 2011, The new digital economy: How it will trans-
form business. June, p. 29, www.oxfordeconomics.com/free/pdfs/the_new_
digital_economy.pdf.
10. Farbey, B., Land, F., and Targett, D., 1999, Moving IS evaluation forward:
Learning themes and research issues. Journal of Strategic Information Systems,
8 (2), 189–207.
11. This chapter is taken from the following publication, Lefley, F., 2013, The
appraisal of ICT and non-ICT capital projects: A study of the current
 Notes 201

practices of large UK organisations. International Journal of Managing Projects

in Business, 6 (3), 505–533.
12. Ward, J., Taylor, P., and Bond, P., 1996, Evaluation and realisation of
IS/IT benefits: An empirical study of current practices. European Journal of
Information Systems, 4 (4), 214–225.
13. Ballantine, J. A., and Stray, S., 1999, Information systems and other capital
investments: Evaluation practices compared. Logistics Information Manage-
ment, 12 (1–2), 78–93.
14. Ho, S. S. M., and Pike, R. H., 1998, Organizational characteristics influ-
encing the use of risk analysis in strategic capital investments. Engineering
Economist, 43 (3), 247–268; Lefley, F., and Sarkis, J., 1997, Short-termism and
the appraisal of AMT capital projects in the US and UK. International Journal
of Production Research, 35 (2), 341–368.
15. Cotton, W. D. J., and Schinski, M., 1999, Justifying capital expenditures in
new technology: A survey. Engineering Economist, 44 (4), 362–374.
16. Ward, J., Taylor, P., and Bond, P., 1996, Evaluation and realisation of
IS/IT benefits: An empirical study of current practices. European Journal of
Information Systems, 4 (4), 214–225.
17. Ballantine, J. A., and Stray, S., 1999, Information systems and other capital
investments: Evaluation practices compared. Logistics Information Manage-
ment, 12 (1–2), 78–93.
18. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
19. Hvolby, H., and Trienekens, J., 2002, Supply chain planning opportunities
for small and medium sized companies. Computers in Industry, 49 (1), 3–8.
20. Heemstra, F. J., and Kusters, R. J., 2004, Defining ICT proposals. Journal of
Enterprise Information Management, 17 (4), 258–268.
21. Heemstra, F. J., and Kusters, R. J., 2004, Defining ICT proposals. Journal of
Enterprise Information Management, 17 (4), 258–268.
22. Ballantine, J. A., Galliers, R. D., and Stray, S. J. 1996, Information sys-
tems/technology evaluation practices: Evidence from UK organisations.
Journal of Information Technology, 11 (2), 129–141.
23. Farbey, B., Land, F., and Targett, D., 1992, Evaluating investments in IT.
Journal of Information Technology, 7 (2), 109–122.
24. Ballantine, J. A., Galliers, R. D., and Stray, S. J. 1996, Information sys-
tems/technology evaluation practices: Evidence from UK organisations.
Journal of Information Technology, 11 (2), 129–141.
25. Lefley, F., 2008, Research in applying the financial appraisal profile FAP
model to an information communication technology project within a pro-
fessional association. International Journal of Managing Projects in Business,
1 (2), 233–259.
26. Farbey, B., Land, F., and Targett, D., 1992, Evaluating investments in IT.
Journal of Information Technology, 7 (2), 109–122.
27. Ward, J., Taylor, P., and Bond, P., 1996, Evaluation and realisation of
IS/IT benefits: An empirical study of current practices. European Journal of
Information Systems, 4 (4), 214–225.
28. See, for example, Lefley, F., 2008, Research in applying the financial appraisal
profile FAP model to an information communication technology project
202 Notes

within a professional association. International Journal of Managing Projects

in Business, 1 (2), 233–259.
29. Hyde, W. D., 1986, How small groups can solve problems and reduce costs.
Industrial Engineering, 18 (12), 42–49.
30. Hambrick, D. C., 1994, Top management groups: A conceptual and recon-
sideration of the team label. Research in Organizational Behavior, 16, 171–213.
31. Lefley, F., 2006, Can a project champion bias project selection and, if so, how
can we avoid it? Management Research News, 29 (4), 174–183.
32. Lefley, F., 2006, Can a project champion bias project selection and, if so, how
can we avoid it? Management Research News, 29 (4), 174–183.
33. Farbey, B., Land, F., and Targett, D., 1992, Evaluating investments in IT.
Journal of Information Technology, 7 (2), 109–122.
34. Farbey, B., Land, F., and Targett, D., 1992, Evaluating investments in IT.
Journal of Information Technology, 7 (2), 109–122.
35. Small, M. H., and Chen, I. J., 1997, Economic and strategic justification of
AMT: Inferences from industrial practices. International Journal of Production
Economics, 49 (1), 65–75.
36. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
37. Rappaport, A., 1965, The discounted payback period. Management Services,
July/August, 30–36.
38. Lefley, F., 1996, The payback method of investment appraisal: A review and
synthesis. International Journal of Production Economics, 44 (3), 207–224.
39. See, for example, Gregory, A., Rutterford, J., and Zaman, M., 1999, The Cost
of Capital in the UK: A Comparison of the Perceptions of Industry and the City
(London: CIMA).
40. Evans, D. A., and Forbes, S. M., 1993, Decision making and display meth-
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Economist, 39 (1), 87–92.
41. Collier, P., and Gregory, A., 1995, Investment appraisal in service industries:
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6 (1), 33–57.
42. Ballantine, J., and Stray, S., 1998, Financial appraisal and the IS/IT invest-
ment decision making process. Journal of Information Technology, 13 (1),
3–14.
43. Ballantine, J., and Stray, S., 1998, Financial appraisal and the IS/IT invest-
ment decision making process. Journal of Information Technology, 13 (1),
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44. See, for example, Davis, E. W., and Pointon, J., 1994, Finance and the Firm.
Second Edition (Oxford: Oxford University Press).
45. Gregory, A., Rutterford, J., and Zaman, M., 1999, The Cost of Capital in
the UK: A Comparison of the Perceptions of Industry and the City. (CIMA:
London).
46. See, for example, Anandarajan, A., and Wen, H. J., 1999, Evaluation of
information technology investment. Management Decision, 37 (4), 329–337.
47. Lefley, F., 1997, Approaches to risk and uncertainty in the appraisal of new
technology capital projects. International Journal of Production Economics, 53
(1), 21–33.
 Notes 203

48. Hillier, F. S., 1963, The derivation of probabilistic information for the
evaluation of risky investments. Management Science, 9 (3), 443–457.
49. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
50. Anandarajan, A., and Wen, H. J., 1999, Evaluation of information technology
investment. Management Decision, 37 (4), 329–337.
51. Baldwin, R. H., 1959, How to assess investment proposals. Harvard Business
Review, May/June, 98–104.
52. Lefley, F., 1996, The payback method of investment appraisal: A review
and synthesis. International Journal of Production Economics, 44 (3),
207–224.
53. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
54. Trahan, E. A., and Gitman, L. J., 1995, Bridging the theory-practice gap in
corporate finance: A survey of chief financial officers. The Quarterly Review of
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56. Mohanty, R. P., and Deshmukh, S. G., 1998, Advanced manufacturing tech-
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Journal of Production Economics, 55 (3), 295–307.

4 Evaluating ICT Project Risk: An Exploratory Study

of UK and Czech Republic Practices
1. Baldwin, R. H., 1959, How to assess investment proposals. Harvard Business
Review, May/June, 98–104.
2. Lefley, F., 1997, Approaches to risk and uncertainty in the appraisal of new
technology capital projects. International Journal of Production Economics, 53
(1), 21–33.
3. Lefley, F., 2008, Research in applying the financial appraisal profile model
to an information communication technology project within a profes-
sional association. International Journal of Managing Projects in Business, 1 (2),
233–259.
4. Simons, R., 1999, How risky is your company? Harvard Business Review, 77
(3), May/June, 85–94.
5. Laverty, K. J., 2004, Managerial myopia or systemic short-termism? Manage-
ment Decision, 42 (8), 949–962.
6. This chapter is taken from the following publication: Hynek, J., Janecek, V.,
Lefley, F., and Pužová, K., 2014, Evaluating project risk: An exploratory study
of UK and Czech Republic practices. International Journal of Systems, Control
and Communications, 6 (2), 167–179.
7. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
204 Notes

8. Lefley, F., 2008, Research in applying the financial appraisal profile model
to an information communication technology project within a profes-
sional association. International Journal of Managing Projects in Business, 1 (2),
233–259; Hynek, J., Janecek, V., Lefley, F., Pužová, K., and Nemecek, J.,
2014, An exploratory study investigating the perception that ICT capi-
tal projects are different? Evidence from the Czech Republic. Management
Research Review, 37 (10), 912–927.
9. Knight, F., 1921, Risk, Uncertainty and Profit (New York: Houghton Muffin).
10. Van Horne, J., 1966, Capital-budgeting decisions involving combinations of
risky investments. Management Science, 13 (2), October, B 84–B 92; Knight, F.,
1921, Risk, Uncertainty and Profit (New York: Houghton Muffin).
11. Choobineh, F., and Behrens, A., (1992), Use of intervals and possibility dis-
tributions in economic analysis. Journal of Operational Research Society, 43 (9),
907–918.
12. Sarper, H., (1993), Capital rationing under risk: A chance constrained
approach using uniformity distributed cash flows and available budgets.
Engineering Economist, 39 (1), Fall, 49–76.
13. Lohmann, J. R., and Baksh, S. N., 1993, The IRR, NPV and PB period and their
relative performance in common capital budgeting decision procedures for
dealing with risk. Engineering Economist, 39 (1), Fall, 17–47.
14. Williams, T. M., 1993, Risk-management infrastructures. International Journal
of Project Management, 11 (1), 5–10.
15. Bernstein, P. L., 1996, Against the Gods: The Remarkable Story of Risk
(New York: John Wiley & Sons).
16. Del Cano, A., and de la Cruz, M. P., 1998, The past, present and future of
project risk management. International Journal of Project and Business Risk
Management, 2 (4), 361–387.
17. Haimes, Y. Y., 1993, Risk of extreme events and the fallacy of the expected
value. Control and Cybernetics, 22 (4), 7–31.
18. Lefley, F., 1996, The PB method of investment appraisal: A review and
synthesis. International Journal of Production Economics, 44 (3), 207–224.
19. Götze, U., Northcott, D., and Schuster, P., 2010, Investment Appraisal: Methods
and Models (Frankfurt: Springer).
20. Dugdale, D., and Jones, C., 1991, Discordant voices: Accountants’ views of
investment appraisal. Management Accounting, 69 (10), 54–56 and 59.
21. Gurnani. C., 1984, Capital budgeting: Theory and practice. Engineering
Economist, 30 (1), Fall, 19–46.
22. Lefley, F., 1997, Approaches to risk and uncertainty in the appraising of new
technology capital projects. International Journal of Production Economics, 53
(1), 21–33.
23. Lohmann, J. R., and Baksh, S. N., 1993, The IRR, NPV and PB period and their
relative performance in common capital budgeting decision procedures for
dealing with risk. Engineering Economist, 39 (1), Fall, 17–47.
24. Ballantine, J. A., and Stray, S., 1999, Information systems and other capital
investments: Evaluation practices compared. Logistics Information Manage-
ment, 12 (1–2), 78–93.
25. Trigeorgis, L., 2000, Real Options: Managerial Flexibility and Strategy in Resource
Allocation (Cambridge, MA: MIT Press).
 Notes 205

26. Trigeorgis, L., 2000, Real Options: Managerial Flexibility and Strategy in Resource
Allocation. (Cambridge, MA: MIT Press).
27. Pálka, P., 2011, Využití reálných opcí pro hodnocení efektivnosti AMT investic
(Žilina: GEORG) 120 s.
28. Petry, G. H., 1975, Effective use of capital budgeting tools. Business Horizons,
18 (5), October, 57–65; Schall, L. D., Sundem, G. L., and Geijsbeek Jr. W. R.,
1978, Survey and analysis of capital budgeting methods. Journal of Finance,
33 (1), March, 281–288; Pike, R. H., 1988, The capital budgeting revolution.
Management Accounting, 66, October, 28–30; Lefley, F., 1997, Approaches to
risk and uncertainty in the appraisal of new technology capital projects.
International Journal of Production Economics, 53 (1), 21–33.
29. Levy, H., and Sarnat, M., 1994, Capital Investment & Financial Decisions. Fifth
edition (New York: Prentice Hall).
30. Del Cano, A., and de la Cruz, M. P., 1998, The past, present and future of
project risk management. International Journal of Project and Business Risk
Management, 2 (4), 361–387.
31. Del Cano, A., and de la Cruz, M. P., 1998, The past, present and future of
project risk management. International Journal of Project and Business Risk
Management, 2 (4), 361–387.
32. Hodder, J. E., and Riggs, H. E., 1985, Pitfalls in evaluating risky projects.
Harvard Business Review, 63 (1), January/February, 128–135.
33. Sick, G. A., 1986, A CE approach to capital budgeting. Financial Management,
15 (4), Winter, 23–32.
34. Beedles, W. I., 1978, On the use of certainty equivalent factors as risk proxies.
Journal of Financial Research, 1 (1), Winter, 15–21.
35. Markowitz, H., 1952, Portfolio selection. Journal of Finance, March, 77–91;
Tobin, J., 1958, Liquidity preference as behavior towards risk. Review of Eco-
nomic Studies, 25, 65–85; Sharpe, W. F., 1964, Capital asset prices: A theory
of market equilibrium under conditions of risk. Journal of Finance, 19 (3),
September, 425–442; Lintner, J., 1965, Security prices, risk, and maximal
gains from diversification. Journal of Finance, XX (4), 587–615; Ryan, B.,
2007, Corporate Finance and Valuation. First edition (Andover, UK: Cengage
Learning EMEA); Pike, R., Neale, B., and Linsley, P., 2012, Corporate Finance
and Investment Decisions and Strategies. Seventh edition (Harlow, UK: Pearson
Education Ltd).
36. Lintner, 1965, p. 591, however, argues that, assuming the investor is a risk
averter, the curve may be concave upwards indicating that, as the risk of their
investment position increases, even larger increments of expected return are
required to make the investor feel ‘as well off’.
37. Dangerfield, B., Merk, L. H., and Narayanaswamy, C. R., 1999, Estimating
the cost of equity: Current practices and future trends in the electric utility
industry. Engineering Economist, 44 (4), 377–387.
38. Lefley, F., 2008, Research in applying the financial appraisal profile model
to an information communication technology project within a profes-
sional association. International Journal of Managing Projects in Business, 1 (2),
233–259.
39. Lefley, F., 1994, Short-termism brings no long-term gains. Administrator,
May, 23.
206 Notes

5 The Development of the FAP Model

1. Fredrickson, J. W., 1985, Effects of decision motive and organizational perfor-
mance level on strategic decision processes. Academy of Management Journal,
28 (4), 821–843.
2. Lefley, F., 1994, Capital investment appraisal of advanced manufacturing
technology. International Journal of Production Research, 32 (12), 2751–2776.
Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capi-
tal projects in the US and UK. International Journal of Production Research, 35
(2), 341–368.
3. Publications on the FAP Model: Lefley, F., 1997, Capital investments: The
‘Financial appraisal profile’. Certified Accountant, June, 89 (6), 26–29. Lefley,
F., 1998, The strategic index: A new approach to the strategic appraisal
of capital projects. Control, September, 24 (7), 26–27. Lefley, F., 1998, Risk
evaluation of capital projects using the risk index. The International Jour-
nal of Project and Business Risk Management, Summer, 2 (2), 69–79. Lefley,
F., and Morgan, M., 1998, A new pragmatic approach to capital investment
appraisal: The financial appraisal profile (FAP) model. International Journal of
Production Economics, 55 (3), 321–341. Lefley, F., and Morgan, M., 1999, The
NPV profile: A creative way of looking at the NPV. Management Accounting,
June, 77 (6), 39–41. Lefley, F., 1999, Value judgments. Accounting Technician,
November, 31–33. Lefley, F., 2000, The financial appraisal profile (FAP) model
of investment appraisal. Management Accounting, March, 78 (3), 28–31. Lefley,
F., 2001, The financial appraisal profile (FAP) model. International Accountant,
12, May, 24–26. Lefley, F., 2001, Decisive action. Financial Management, Octo-
ber, 36–38. Lefley, F., 2002, The advantages of the Net Present Value Profile
(NPVP) model of financial appraisal. International Accountant, (14), January,
18–20. Lefley, F., 2002, Adding value to investment appraisal with the Finan-
cial Appraisal Profile (FAP) model. Einstein Network – Finance Channel, 838
Management Accounting, May. Lefley, F., 2002, The financial appraisal pro-
file model, accounting web. Business Management Zone, 26 November. Lefley,
F., 2003, The third way. Financial Management, October, 18–19. Lefley, F.,
2004, A brief introduction to the financial appraisal profile (FAP) model.
International Journal of Applied Finance For Non-Financial Managers, January,
1 (1). Lefley, F., 2004, The positioning of the financial appraisal profile (FAP)
model within a project evaluation matrix. International Journal of Applied
Finance for Non-Financial Managers, February, 1 (1). Lefley, F., 2004, The
evaluation of project risk: A more pragmatic approach. International Journal
of Applied Finance for Non-Financial Managers, April, 1 (2). Lefley, F., 2004,
Clear and present value. Accounting Technician, June, 22. Lefley, F., 2004,
An assessment of various approaches for evaluating project strategic ben-
efits: Recommending the strategic index (SI). Management Decision, 42 (7),
850–862. Lefley, F., and Sarkis, J., 2004, Applying the financial appraisal
profile (FAP) model to the evaluation of strategic information technology
projects. International Journal of Enterprise Information Systems, 4 (3), 14–24.
Lefley, F., and Sarkis, J., 2005, Applying the FAP model to the evaluation
of strategic information technology projects. International Journal of Enter-
prise Information Systems (IJEIS), 1 (2), 69–90. Lefley, F., 2006, Can a project
 Notes 207

champion bias project selection and, if so, how can we avoid it? Management
Research News, 29 (4), 174–183. Lefley, F., 2008, Research in applying the
financial appraisal profile (FAP) model to an information communication
technology project within a professional association. International Journal
of Managing Projects in Business, 1 (2), 233–259. Lefley, F., and Sarkis, J.,
2009, Environmental assessment of capital projects: Applying the financial
appraisal profile model. Operations Management, 35 (2), 28–33. Lefley, F., and
Sarkis, J., 2013, How to evaluate capital projects that offer environmen-
tal/carbon reducing benefits. International Journal of Applied Logistics. 4 (3),
14–24.
4. Frankfort-Nachmias, C., and Nachmias, D., 1996, Research Methods in the
Social Sciences. Fifth edition (London: Arnold).
5. Butler, J. D., 1968, Four Philosophies and Their Practice in Education and
Religion. (New York: Harper & Row).
6. Lefley, F., 2004, The positioning of the financial appraisal profile (FAP) model
within a project evaluation matrix. International Journal of Applied Finance for
Non-Financial Managers, February, 1 (1).
7. For an overview of the real options literature, see, Howell, S., Stark, A.,
Newton, D., Paxson, D., Cavus, M., and Pereira, J, 2001, Real Options: Evaluat-
ing Corporate Investment Opportunities in a Dynamic World. (London: Financial
Times Prentice Hall).
8. Stark, A. W., 1990, Irreversibility and the capital budgeting process. Man-
agement Accounting Research, 1 (3), 167–180 and Trigeorgis, L., 2000, Real
Options: Managerial Flexibility and Strategy in Resource Allocation. (Cambridge,
MA: MIT Press).
9. Brigham, E. F., 1975, Hurdle rates for screening capital expenditure proposals.
Financial Management, 4 (3), 17–26.
10. Mohanty, R. P., and Deshmukh, S. G., 1998, Advanced manufacturing tech-
nology selection: A strategic model for learning and evaluation. International
Journal of Production Economics, 55 (3), 295–307.
11. We use the normative term ‘protocol; to highlight the FAP model’s emphasis
on what ought to be done rather than the descriptive terms of either ‘process’
or ‘procedure’.
12. Cross, R. L., and Brodt, S. E., 2001, How assumptions of consensus under-
mine decision making. Sloan Management Review, 42 (2), 86–94.
13. See, for example, Priem, R. L., 1990, Top management team group factors,
consensus, and firm performance. Strategic Management Journal, 11, 469–478
and Hambrick, D. C., 1994, Top management groups: A conceptual and
reconsideration of the ‘team’ label. Research in Organizational Behavior, 16,
171–213.
14. Simons, T., Pelled, L. H., and Smith, K. A., 1999, Making use of differ-
ence: Diversity, debate, and decision comprehensiveness in top management
teams. Academy of Management Journal, 42 (6), 662–673.

6 The FAP Model – Basic Data

1. Gregory, A., Rutterford, J., and Zaman, M., 1999, The Cost of Capital in the UK:
A Comparison of the Perceptions of Industry and the City. (CIMA: London).
208 Notes

2. Kalu, Ch. U., 1999, Capital budgeting under uncertainty: An extended goal
programming approach. International Journal of Production Economics, 58 (3),
235–251.
3. Peccati, L., 1996, The Use of the WACC for Discounting Is Not a Great Idea.
(Atti del Ventesimo Convengno Annuale, AMASES: Urbino), 5–7 Settembre,
527–534.
4. Levy, H., and Sarnat, M., 1994, Capital Investment & Financial Decisions. Fifth
edition (New York: Prentice Hall).
5. Paxson, D., and Wood, D., 1998, Blackwell Encyclopedic Dictionary of Finance.
(Oxford: Blackwell).
6. See, for example, Peccati. L., 1993, The appraisal of industrial investments:
A new method and a case study. International Journal of Production Eco-
nomics, 30–31, 465–476, and Booth, R., 1999, Avoiding pitfalls in investment
appraisal. Management Accounting, 77 (10), 22–23.
7. Support for interpreting the NPV as an ‘economic return’ is found in the mod-
ern financial literature, see, for example, Grinblatt, M., and Titman, S., 1998,
Financial Markets and Corporate Strategy. (Boston: Irwin/McGraw-Hill), where
they refer to the ‘economic value added’ version of the NPV, as a measure of a
company’s true economic profitability.
8. The term ‘residual value’ is given to the terminal value of a capital invest-
ment and may be calculated using a number of methods of which the most
common are: (a) the Price/Earnings ratio which is used to calculate the best
estimate of the investments market value, (b) the Perpetuity method which
estimates the residual value as being the PV of an ongoing stream of future
cashflows, (c) the book value of the investment, and (d) the liquidation value
of the investment.

7 The FAP Model – The Net Present Value Profile (NPVP)

1. See, for example, Sangster, A., 1993, Capital investment appraisal techniques:
A survey of current usage. Journal of Business Finance & Accounting, 20 (3),
307–332, and Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal
of AMT capital projects in the US and UK. International Journal of Production
Research, 35 (2), 341–368.
2. Lefley, F., and Sarkis, J., 1997. Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.
3. The most common form of MIRR compounds the net cash inflows to a single
figure at the end of the project’s economic life and then, using a base figure
for the cost of the project, calculates the modified return from that project,
when, using interest tables, the interest rate is found which when applied to
the base cost of the project produces the compounded net cash inflow figure
at the end of the life of the project.
4. Lefley, F., 1997, Capital investments: The ‘Financial appraisal profile’. Certi-
fied Accountant, June, 89 (6), 26–29.
5. Keef, S., and Olowo-Okere, E., 1998, Modified internal rate of return: A pitfall
to avoid at any cost! Management Accounting, 76 (1), 50–51.
 Notes 209

6. Gregory, A., Rutterford, J., and Zaman, M., 1999, The Cost of Capital in
the UK: A Comparison of the Perceptions of Industry and the City. (CIMA:
London).
7. Booth, R., 1999, Avoiding pitfalls in investment appraisal. Management
Accounting, 77 (10), 22–23.
8. Bengtsson, J., 2001, Manufacturing flexibility and real options: A review.
International Journal of Production Economics, 74 (1–3), 213–224.
9. Grinblatt, M., and Titman, S., 1998, Financial Markets and Corporate Strategy.
(Boston: Irwin/McGraw-Hill).
10. Pike, R. H., 1985, Disenchantment with DCF promotes IRR. Certified Accoun-
tant, July, 14–17.
11. The mathematical ‘relationship’ between the MGR and the MIRR is (1 +
MIRR) = (1 + MGR) × (1 + cost of capital). See also Lefley, F., 2004, Clear and
present value. Accounting Technician, June.
12. Lefley, F., and Sarkis, J., 1997, Short-termism and the appraisal of AMT capital
projects in the US and UK. International Journal of Production Research, 35 (2),
341–368.

8 The FAP Model – The Project Risk Profile (PRP)

1. See, for example, Markowitz, H., 1952, Portfolio selection. Journal of Finance,
March, 77–91.
2. Williams, T. M., 1993, Risk-management infrastructures. International Journal
of Project Management, 11 (1), 5–10.
3. By negative outcome, we mean an outcome that is less financially or strate-
gically advantageous to the firm compared with the expected position if the
project were not to proceed.
4. In theory, the importance of risk is the product of its impact multiplied by its
probability of occurrence (R = I × P). This therefore assumes that managers
will treat, as having the same value (importance) and have no preference
for either, a specific risk with an impact of 60 (on a scale of 0–100) and a
probability of 10%, and a risk with an impact of 10 and a probability of
60% (both having a value of 6.0). Tests, however, from a small sample of
managers, suggested that they treated as ‘equal’ a risk with an impact of 55
and a probability of 10% (5.5), and an impact of 10 with a probability of
60% (6.0). Managers were clearly placing a greater level of significance to
higher levels of risk impact, by subconsciously applying a disutility factor to
the impact values – in this example the disutility factor is 1.0909, so that
55 × 0. 1 × 1. 0909 = 6. 0, which equates to 10 × 0. 6 ( = 6. 0). So, by applying
a disutility factor to the perceived risk impact value, a DIV is achieved. It is
argued that the disutility factor will increase exponentially from 1 to (in this
example) 1.0909.
5. Madu, C. N., 1994, A quality confidence procedure for GDSS application in
multicriteria decision making. IIE Transactions, 26 (3), 31–39.
6. Debate is the spontaneous emergent task-focused discussion of differing per-
spectives and approaches to the task in hand and includes the questioning
or challenging of assumptions, reasoning, criteria, or sources of information,
disagreement with direct and open presentation of rival recommendations.
210 Notes

7. Simons, T., 1995, Top management team consensus, heterogeneity, and

debate as contingent predictors of company performance: The complemen-
tarity of group structure and process. In: Academy of Management Best Paper
Proceedings, Vancover, WA, pp. 62–66.
8. Simons, T., Pelled, L. H., and Smith, K. A., 1999, Making use of differ-
ence: Diversity, debate, and decision comprehensiveness in top management
teams. Academy of Management Journal, 42 (6), 662–673.
9. Merkhofer, M. W., 1987, Quantifying Judgmental uncertainty: Methodology,
experiences, and insights. IEEE Transaction on Systems, Man, and Cybernetics,
17 (5), 741–752.
10. Tversky, A., and Kahneman, D., 2000, Judgement under uncertainty:
Heuristics and biases, in Connolly, T., Arkes, H. R., and Hammond, K. R.,
(ed.), Second edition, Judgement and Decision Making, Cambridge: Cambridge
University Press, 35–52.
11. One may also assume that with a reasonably large team and a number
of ‘iterations’ within the ‘quasi-Delphi approach’ the idiosyncratic beliefs
are likely to be diversified away leaving a core of rational beliefs as the
dominating influence in the group judgement.
12. Cross, R. L., and Brodt, S. E., 2001, How assumptions of consensus under-
mine decision making. Sloan Management Review, 42 (2), 2001, 86–94.
13. Hertz, D. B., 1964, Risk analysis in capital investment. Harvard Business
Review, 42 January/February, 95–106.

9 The FAP Model – The Strategic Index (SI)

1. Saaty, T. L., 1980, The Analytic Hierarchy Process. (New York: McGraw-Hill).
2. Narasimhan, R., 1983, An analytical approach to supplier selection. Journal of
Purchasing and Materials Management, 19 (4), Winter, 27–32.
3. See Simons, T., 1995, Top management team consensus, heterogeneity, and
debate as contingent predictors of company performance: The complemen-
tarity of group structure and process. In: Academy of Management Best Paper
Proceedings, Vancouver, WA, 62–66.
4. See Madu, C. N., Kuei, C-H., and Madu, A. N., 1991, Setting priorities for the
IT industry in Taiwan – A Delphi study. Long Range Planning, 24 (5), 105–118.
5. Hambrick, D. C., 1981, Strategic awareness within top management teams.
Strategic Management Journal, 2, 263–279.
6. See Wheelwright, S. C., and Hayes, R. H., 1985, Competing through manufac-
turing. Harvard Business Review, 63 (1), 99–109.

10 Summary Comments on the FAP Model

1. Hambrick, D. C., 1981, Strategic awareness within top management teams.
Strategic Management Journal, 2, 263–279.
2. Janis, I. L., 1982, Groupthink. (Boston: Houghton Mifflin).
3. Tversky, A., and Kahneman, D., 2000, Judgement under uncertainty:
Heuristics and biases, in Connolly, T., Arkes, H. R., and Hammond, K. R.,
(ed.), Second edition, Judgement and Decision Making. (Cambridge: Cambridge
University Press), 35–52.
 Notes 211

4. See, for example, Kaplan, R. S., and Norton, D. P., 1996, The Balanced Scorecard.
(Boston: Harvard Business School).
5. Farragher, E. J., Kleiman, R. T., and Sahu, A. P., 1999, Current capital
investment practices. Engineering Economist, 44 (2), 137–150.
6. Small M. H., and Chen, I. J., 1997, Economic and strategic justification of
AMT: inferences from industrial practices. International Journal of Production
Economics, 49 (1), 65–75 and Papadakis, V. M., 1998, Strategic investment deci-
sion processes and organizational performance: An empirical examination.
British Journal of Management, 9 (2), 115–132.
7. Bourgeois, L. J., III, 1981, On the measurement of organization slack. Academy
of Management Review, 6 (1), 29–39 and Cyert, R. M., and March, J. G., 1992,
A Behavioral Theory of the Firm. Second Edition, (Oxford: Blackwell).
8. Fredrickson, J. W., 1985, Effects of decision motive and organizational perfor-
mance level on strategic decision processes. Academy of Management Journal,
28 (4), 821–843.

11 Applying the FAP Model to an ICT Project within

a Professional Association
1. Mohanty, R. P., and Deshmukh, S. G., 1998, Advanced manufacturing
technology selection: A strategic model for learning and evaluation. Inter-
national Journal of Production Economics, 55 (3), 295–307; Serafeimidis, V.,
and Smithson, S., 2000. Information systems evaluation in practice: A case
study of organizational change. Journal of Information Technology, 15 (2),
93–105.
2. Ballantine, J., and Stray, S., 1998. Financial appraisal and the IS/IT invest-
ment decision making process. Journal of Information Technology, 13 (1),
3–14.
3. Small, M. H., and Chen, I. J., 1997, Economic and strategic justification of
AMT: Inferences from industrial practices. International Journal of Production
Economics, 49 (1), 65–75.
4. Graham, J. R., and Harvey, C. R., 2001. The theory and practice of corpo-
rate finance: Evidence from the field. Journal of Financial Economics, 60 (2–3),
187–243.
5. Bannister, F., and Remenyi, D., 2000. Acts of faith: Instinct, value
and IT investment decisions. Journal of Information Technology, 15 (3),
231–241.
6. Serafeimidis, V., and Smithson, S., 2000, Information systems evaluation
in practice: A case study of organizational change. Journal of Information
Technology, 15 (2), 93–105.
7. Introna, L. D., 1997, Management, Information and Power: A Narrative of the
Involved Manager. (Basingstoke: Macmillan).
8. Feldman, S. M., 2005, The problem of critique: Triangulating Habermas,
Derrida, and Garamer within metamodernism. Contemporary Political Theory,
4 (3), 308.
9. Whitley, E. A., 1999. Understanding participation in entrepreneurial organi-
zations: Some hermeneutic readings. Journal of Information Technology, 14 (2),
194.
212 Notes

10. Pondy, L. R., 1983. Union of rationality and intuition in management action,
in Srivastva, S., and Associates (eds.), The Executive Mind. (San Francisco:
Jossey-Bass), 169–191.
11. Heemstra, F. J., and Kusters, R. J., 2004. Defining ICT proposals. Journal of
Enterprise Information Management, 17 (4), 266.
12. Bannister, F., and Remenyi, D., 2000. Acts of faith: Instinct, value and
IT investment decisions. Journal of Information Technology, 15 (3), 235.
13. Lefley, F., and Sarkis, J., 2005. Applying the FAP model to the evaluation of
strategic information technology projects. International Journal of Enterprise
Information Systems, 1 (2), 68–87.
14. Janis, I. L., 1982, Groupthink. (Boston: Houghton Mifflin).
15. Tversky, A., and Kahneman, D., 2000, Judgement under uncertainty:
Heuristics and biases, in Connolly, T., Arkes, H. R., and Hammond, K. R.,
(ed.), Second edition, Judgement and Decision Making. (Cambridge: Cambridge
University Press), 35–52.
16. Habermas, J., 1990, Moral Consciousness and Communicative Action. Studies in
Contemporary German Social Thought. (Cambridge, MA: MIT). 198.
17. Klecun, E., and Cornford, T., 2005, A critical approach to evaluation.
European Journal of Information Systems, 14 (3), 233.
18. This chapter is taken from the following publication, Lefley, F., 2008,
Research in applying the financial appraisal profile (FAP) model to an
information communication technology project within a professional asso-
ciation. International Journal of Managing Projects in Business, 1 (2), 233–259.
19. Members, from both the management team and corporate management,
directors/council members, were asked to indicate, on a scale of 0 to 10,
whether they perceived themselves to be risk-averse or risk-takers in a busi-
ness context, with 0 indicating that they were prepared to take no risks at all
and 10 indicating that they perceived themselves to be very high risk-takers.
They were then asked to multiply this figure by a factor of 10 and told that
this would now represent the percentage level of a specific risk impact on a
capital project. They were then asked to indicate the maximum level of risk
probability, in relation to this level of impact, which they would be prepared
to accept as an individual and specific to their own area of responsibility and
risk control. The data obtained were respectively – impact/probability – for
five members of the management team, 70/10, 20/90, 65/10, 80/10, 75/10
and for six directors/council members, 80/10, 75/15, 30/50, 55/5, 70/15,
50/20. It is interesting to note (assuming the figures were entered correctly,
which, as one will appreciate, makes no difference to the calculation of the
mean value) that in both sets of figures there is one individual who shows
a low impact figure, but a high probability value, which results in high-
RVs, where RV = I × P. So, on the one hand, they perceive themselves to be
risk-averse, while, on the other hand, they show themselves to be high risk-
takers. The arithmetic mean for the management team was 9.4, while the
arithmetic mean for the directors/council members was 9.58. It was therefore
agreed that the CRT should be 9.5.
20. In theory, the importance of a particular project-specific risk is the product
of its perceived impact multiplied by its probability of occurrence (R = I × P).
This therefore assumes that managers will treat, as having the same value
(importance) and have no preference for either, a specific risk with an impact
of 60 (on a scale of 0 to 100) and a probability of 10%, and a risk with an
 Notes 213

impact of 10 and a probability of 60% (both having a value of 6.0). Lim-

ited tests, however, suggest that managers treat as ‘equal’ a risk with an
impact of 55 and a probability of 10% (5.5), and an impact of 10 with a
probability of 60% (6.0). Managers were clearly placing a greater level of
significance to higher levels of risk impact, by subconsciously applying a
disutility factor to the impact values – in this example, the disutility factor
is 1.0909 so that 55 × 0. 1 × 1. 0909 = 6. 0 which equates to 10 × 0. 6 ( = 6. 0).
So, by applying a disutility factor to the perceived risk impact value, a DIV is
achieved. It is argued that, in this instance, the disutility factor will increase
exponentially from 1 to 1.0909 for impact values of between 1 and 55. The
formula for arriving at a disutility factor is c = (b − 1)/[1n(a/b)]; y = e[(x−1)/c] .
If a = 60 and b = 55, then a/b = 1. 0909; c = (55 − 1)/(1n 1. 0909) = 620. 6679.
So that if x = 55, then y = e[(55−1)/620.6679] = 1. 0909. If, for example, x = 40, then
y = e[(40−1)/620.6679] = 1. 0649.
21. Gregory, A., Rutterford, J., and Zaman, M., 1999, The Cost of Capital in
the UK: A Comparison of the Perceptions of Industry and the City. (London:
CIMA).
22. Rauch, W., 1979, The decision Delphi. Technology Forecasting and Social
Change, 15 (3), 159–169.
23. Lefley, F., and Sarkis, J., 2005, Applying the FAP model to the evaluation of
strategic information technology projects. International Journal of Enterprise
Information Systems, 1 (2), 68–87.
24. Bromwich, M., and Bhimani, A., 1991, Strategic investment appraisal.
Management Accounting, 69 (3), 45–48.
25. Hambrick, D. C., 1981, Strategic awareness within top management teams.
Strategic Management Journal, 2 (3), 263–279.
26. Dixon, R., 1988, Investment Appraisal – A Guide for Managers. (London, Kogan:
Page/CIMA).
27. Madu, C. N., Kuei, C-H., and Madu, A. N., 1991, Setting priorities for the
IT industry in Taiwan – A Delphi study. Long Range Planning, 24 (5), 105–118.
28. Cross, R. L., and Brodt, S. E., 2001, How assumptions of consensus under-
mine decision making. Sloan Management Review, 42 (2), 86–94.
29. Habermas, J., 1990, Moral Consciousness and Communicative Action. Studies in
Contemporary German Social Thought. (Cambridge, MA: MIT).
30. Simons, T., 1995, Top management team consensus, heterogeneity, and
debate as contingent predictors of company performance: The complemen-
tarity of group structure and process. In: Academy of Management Best Paper
Proceedings, Vancouver, WA, pp. 62–66.
31. Archard, D., 2004, Review of ‘from pluralist to patriotic politics, putting
practice first, by C. Blattberg. 2000, Oxford: Oxford University Press. Con-
temporary Political Theory, 3 (2), 212–213.
32. See, for example, Scapens, R. W., Sale J. T., and Tikkas P. A., 1982, Financial
Control of Divisional Capital Investment. (London: ICMA); Pike, R. H., 1983,
A review of recent trends in formal capital budgeting processes. Account-
ing and Business Research, 51 (Summer), 201–208; McIntyre, A. D., and
Coulthurst, N. J., 1986, Capital Budgeting Practices in Medium-Sized Businesses –
A Survey. A Research Report. (London: Institute of Cost and Management
Accountants).
33. Primrose, P., 1991, Investment in Manufacturing Technology. (London:
Chapman and Hall).
214 Notes

Appendix 1: The Accounting Rate of Return

1. This appendix is based on an earlier published paper by the author: Lefley, F.,
1998, Accounting rate of return: Back to basics. Management Accounting (UK),
76 (3), 52–53.
2. Note:
Depreciation based on straight line method
Year 1, £9,487; Year 2, £9,487; Year 3, £9,487; Year 4, £9,487; Year 5, £9,487.
[Total depreciation £47,435].

Accumulated depreciation
End of Year 1, £9,487; Year 2, £18,974; Year 3, £28,461; Year 4, £37,948; Year
5, £47,435.
3. Note:
Depreciation based on 40% reducing balance
Year 1, £20,574; Year 2, £12,344; Year 3, £7,407; Year 4, £4,444; Year 5, £2,666.
[Total depreciation £47,435].

Accumulated depreciation
End of Year 1, £20,574; Year 2, £32,918; Year 3, £40,325; Year 4, £44,769; Year
5, £47,435.
Net income
Year 1, £574 (loss); Year 2, £12,656; Year 3, £12,593; Year 4, £10,556; Year 5,
£4,334. [Total net income £39,565].

[ROI] Investment
Beginning of Year 1, £51,435; Year 2, £30,861; Year 3, £18,517; Year 4, £11,110;
Year 5, £6,666.

[ROCE] Investment
Beginning of Year 1, £56,000; Year 2, £35,426; Year 3, £23,082; Year 4, £15,675;
Year 5, £11,231. [It is assumed that the working capital is required at the begin-
ning of the first year].

ROI
Year 1, 1.12% loss; Year 2, 41.01%; Year 3, 68.01%; Year 4, 95.01%; Year 5,
65.02%.

ROCE
Year 1, 1.03% loss; Year 2, 35.73%; Year 3, 54.56%; Year 4, 67.34%; Year 5,
38.59%.

Appendix 2: Calculating the Modified Internal Rate

of Return from the Net Present Value
1. Tang, S. L., and Tang, H. J., 2003, Technical Note – The variable financial
indicator IRR and the constant economic indicator NPV. Engineering Economist,
48 (1), 69–78. Hajdasinski, M. M., 2004, Technical Note – The internal rate of
return (IRR) as a financial indicator. Engineering Economist, 49 (2), 185–197.
 Notes 215

2. Drury, C., 1988, Management and Cost Accounting. Second edition,

(London: Chapman and Hall). Lorie, J. H., and Savage, L. J., 1955,
Three problems in rationing capital. Journal of Business, 28 (4), October,
229–239.
3. Baldwin, R. H., 1959, How to assess investment proposals. Harvard Business
Review, 37 (3), May/June, 98–104. Lin, S. A. Y., 1976, The modified internal
rate of return and investment criterion. Engineering Economist, 21 (4), Summer,
237–247.
4. Lefley, F., 1997, The modified internal rate of return (MIRR): Will it replace
IRR? Management Accounting (UK), 75 (1), 64–65.
Index

abandonment option, see option certainty equivalent value, 9, 31,

theory 70, 75
abandonment value, 88, 89, 102, 104, approach, 76
105, 111, 112, 121, 144, 158, 160, CE-v, see certainty equivalent value
174 coefficient of variation, 118, 123, 168
ABC, see activity based costing cognitive availability, 127
accounting rate of return, 1, 3, 4, 5, 6, complexity, 22, 45, 52, 73, 82, 84
7, 29, 53, 65, 101, 176 discussion on, 85
calculation of, 182–7 and the FAP model, 86
deficiencies, 182 and new technology, 149
initial versus average investment, conceptional reasoning, 84–6
183–4 consensus outcome, 19–20, 142
reasons for use, 183 discussion on, 19
‘Accounting technician’, 101 controlled conflict, 20, 120, 165, 178,
activity based costing, 139 179
advanced manufacturing technology, corporate ranking, 128, 138, 170, 173
28, 72, 142, 152 corporate risk threshold, 115, 122,
AMT, see advanced manufacturing 131, 144, 145, 157, 169, 212
technology meaning of, 116
ARR, see accounting rate of return cost/benefit analysis, 86, 87, 89
availability heuristics, 18, 125 cost of capital, 1, 5, 7, 12, 14, 54, 75,
91, 94, 102, 104, 109, 115, 159,
174, 189
balanced scorecard, 13, 14, 15
and the FAP model, 99
Ballantine and Stray, 36, 38
meaning of, 96
Bannister, 154
see also opportunity cost of capital
Bayes’ Theorem, 114
Cotton, 38
Bengtsson, 102 CR, see corporate ranking
Bentham, 76 CRT, see corporate risk threshold
Berstein, 70
beta, 10 DCF, see discounted cash flow
Booth, 101 decision-making, 2, 8, 23, 34, 35, 144
conflict, 20, 50, 120, 135, 165, 171,
capital asset pricing model, 10, 11, 14, 178, 179
31, 32, 57, 58, 66, 68, 70, 71, 75, consensus outcome, 142
77, 79, 96 and the FAP model, 149–51
capital cost of project, 6, 8, 45–6, 86, financial, 61, 92
88, 89, 91, 92–6, 104, 106, 107, group discussion, 15, 17, 131, 135
108, 110, 157, 180, 183, 185, 188 groupthink, 177
capital investment decision making, investment, 85, 128
2, 8 judgmental approach, 36
CAPM, see capital asset pricing model process, 11, 64, 76, 82, 135
cash generation, 85, 87 strategic, 13, 146

216
 Index 217

decision trees, 31, 32, 57, 70, 71 justification of, 1, 2

explanation of, 73 positioning of, 86–90
practical limitations, 73 protocol, 90, 91, 100, 114, 116, 121,
De la Cruz, 70, 76 132, 136, 142, 144, 146, 148,
Del Cano, 70, 76 149, 154, 157–8
Delphi model, 119, 125, 133, 135, summary comments, 144–51
146, 154, 158, 161–4, 166, 170, Feldman, 153
177 financial theory, 8, 9, 31, 70, 153
classical, 17 interface with risk, 9–11
decision, 17 financial uncertainty, 86
explanation of, 16–18
policy, 17 generalised adjusted present value, 6
De Moivre, 70 groupthink, 19, 20, 127, 134, 147,
discounted cash flow, 1, 14, 68, 76, 86, 154, 155, 158, 177, 179, 181
90, 107, 157 growth option, 22, 74, 89, 90, 142
models, 4, 8, 55, 65, 75, 88, 176, 185
discounted payback, 29, 52, 189, 191
Habermas, 155
advantage over the PB, 108–10
Hambrick, 142
discounted payback index, 91, 189
Heemstra, 41, 153
discount rate, 6, 7, 31, 52, 80, 88, 93,
Hertz, 127
99, 104, 137, 188
heuristics, 18, 125, 147, 154
determination of, 55, 80, 157
influences on, 54
risk adjusted, 9, 58, 68, 69, 75, 80 ICT, see information communication
risk free, 9, 76 technology
unadjusted, 105 information communication
used in valuation of a company, 10 technology, 1, 2, 3, 20
see also cost of capital; opportunity application of the FAP model, 174
cost of capital appraisal, 34–67
dissensus, 135, 178 appraisal problems, 20, 63
disutility impact value, 116, 117, 122, appraisal teams, 46–8
124, 146, 157 assessment of, 28, 33
DIV, see disutility impact factor case study, 152–81
DPB, see discounted payback classification of projects, 40–1
DPBI, see discounted payback index departmental influence, 48–50
financial models used, 30, 34,
economic value, 13, 14, 85, 92 53–6, 62
economic value added, 13, 14, 15 formal appraisal, 28–9, 41–4, 51–2
embeddedness, 85, 86 importance of investing, 34–5
expected utility, 76 perceived differences, 21–33
post audit, 44–5
FAP model, 90, 101, 141 project champion, 50–1
advantages of, 3, 147–8 project risk, 32, 56–9, 68–81
aid to decision-making, 149–51 internal rate of return, 1, 4, 5, 7, 30,
case study, 152–81 52, 53, 54, 66, 87, 101, 108, 152,
constituent parts of, 91 176, 188, 189
development of, 82–91 calculation of, 6, 7
discussion on, 4–8 the failings of, 6, 21, 188
and ICT projects, 52–4 financial indicator, 188
218 Index

internal rate of return – continued discount rate used, 7, 8, 10, 56, 58,
hurdle rate, 8, 31, 32, 56, 57, 58, 71, 75, 92
77, 88 faults/deficiencies, 6, 21, 110–11,
importance of, 54 112, 152
management preference, 7, 53, 101, lack of management support, 3,
188 101, 108, 176
as a measure of performance, 29 preference, 52, 53
IRR, see internal rate of return seen in a different light, 102, 104
IT score, 22, 154, 158, 159, 174, 175 shareholder value, 100
net present value profile, 83, 91,
JIT, see just in time 100–12, 144, 188, 189
judgmental heuristics, 18, 125–6 advantage of, 110–11, 121, 144, 189
just in time, 118 calculation of, 104–8, 159–60
discount rate used, 93, 96, 99, 157
Kahneman, 125, 126 NPV, see net present value
Keef, 101 NPVP, see net present value profile
Kotler, 18
Kusters, 153 Olowo-Okere, 101
opportunity cost of capital, 1, 54, 55,
Likert scale, 25, 37, 69 85, 92, 96, 98–9
support for, 26 option theory, 22, 31, 32, 57, 66, 70,
71, 73–4, 79
manipulation (of investment abandonment, 22, 74, 87–8, 102,
decision), 14, 17, 181, 183 104, 105, 147, 159, 160, 175
marginal growth rate, 91, 102, 103, deferment, 22, 87, 88, 90, 147
104–8, 110, 144, 145, 159, 160, growth, 22, 74, 87, 89, 90, 142, 147
174, 189, 190, 191, 192 reduction, 87, 89, 147
MGR, see marginal growth rate see also real optons
MIRR, see modified internal rate of
return payback, 1, 3, 4, 6, 8, 31, 32, 57, 58,
modern portfolio theory, 77 66, 68, 74, 78, 80, 103, 174, 190
modified internal rate of return, 7, 29, advantage of the DPB over, 108–10
30, 52, 53, 101, 106 importance, 30, 53, 54, 56, 57, 65
advantage, 6 liquidity, 7, 29
calculating, 108, 192 popularity, 5, 9, 30, 52, 53, 57,
importance, 54, 66 61, 71
linkage to NPV, 188–92 short-termism, 60–1
Monte Carlo simulation, 86 time risk, 7, 8, 31, 71–2, 75, 88
Multi-attribute model, 84 weakness of, 5–6, 21–2, 106, 191
FAP as a, 90, 91, 144, 154 see also discounted payback
PB, see payback
net present value, 1, 4, 7, 30, 53, 54, perceived environmental uncertainty,
66, 73, 76, 85, 87, 90, 92, 100, 91, 132
104, 152, 188 positivist approach, 34, 152, 153
academic preference, 3, 5, 29, 101 post audit, 36, 37, 38, 44–5, 65, 179,
calculation of, 105, 157, 160, 190 180
the definitive technique, 1 post completion audit, see post
determination of, 154 audit
 Index 219

pragmatic, 2, 9, 12, 20, 30, 31, 61, 70, return on capital employed, 182
72, 74, 83, 84, 86, 126, 148, 153 return on investment, 30, 53, 54, 62,
present value index, 6 65, 182, 184, 185, 186, 187
primary profile model, 12, 142 risk analysis, 56–9
probability analysis, 8, 31, 32, 57, 66, risk appraisal models, 8–9, 21
70, 73, 75, 79 risk area index, 115, 116, 118, 121,
project appraisal, 24, 30, 33, 50, 52, 122, 124, 125, 145, 161, 170, 174
55–6, 66, 69 estimating, 116
departmental influence, 37, risk areas, 117–18, 123, 124, 125, 126,
48–50, 67 146, 170
formal/informal assessment, 37, 41, see also risk, area of responsibility
51–2, 66, 67, 70 risk, areas of responsibility, 116, 119,
other factors considered, 59–60, 67 123, 125, 161, 167–8, 170
project capital cost, 6, 8, 45–6, 86, 88, risk, interface with finance, 9–11
89, 91, 92–6, 104, 106–8, 110, risk, negative aspect of, 69
157, 180, 183, 185, 188 risk profile, 23, 75, 96, 116, 118, 121,
project champion, 36, 37, 50–1, 122, 125, 126, 127, 146, 160, 161,
90, 132, 155, 170, 176, 177, 179, 169, 170
181 see also project risk value
excessive influence, 65, 179, 181 risk, uncertainty, 69–70
project evaluation matrix, 2, 86, 87, risk value, 114, 115, 119, 121, 125,
88, 89 126, 145, 161, 169, 170, 177, 179
project life, estimation, 91, 99 calculation of, 118, 121, 122, 124,
project risk profile, 91, 113–27 169
calculation of, 121–5 ROCE, see return on capital employed
and CRT, 116–17 ROI, see return on investment
protocol, 118–21 RV, see risk value
project specific risk, 3, 10, 24, 25,
32, 37, 51, 52, 55, 58, 62, 67, 68,
Sarkis, 72
72, 73, 75, 80, 81, 82, 87, 88, 91,
Schinski, 38
98, 99, 101, 102, 104, 105, 107,
score models, 5, 11, 86, 87, 89, 90
113, 114, 153, 159, 161, 173, 175,
181 sensitivity analysis, 8, 9, 22, 31, 32,
project strategic score value(s), 128, 56, 57, 66, 70, 71, 72, 73, 74, 79,
133, 134, 142, 177 86, 87
calculation of, 141, 171–3 short-termism, 4, 39, 60, 61, 62, 69,
PRP, see project risk profile 80, 185
PSSV, see project strategic score value SI, see strategic index
Simons, 135, 178
quasi-delphi approach, 119, 120, 125, strategic index, 91, 128–43
126, 127, 133, 134, 146, 154, 158, calculation/determination of,
163, 166, 170, 177, 178 136–41, 165–73, 174
protocol, 129–36
RAI, see risk area index worked example, 136
real options, 73–4, 84, 87, 88, 90 strategic models, 2, 11–12, 89, 142
Remenyi, 154 strategic score models, 86, 87, 89
research path (in developing the FAP
model), 2, 83–6 taxation, 8, 55, 95
research – pragmatic approach, 13, 84 impact of, 94–5
220 Index

team approach, 2, 3, 13, 19, 48, 135, utility theory, 22, 76

141, 149, 177, 178
conflict, 135
importance of, 48 WACC, see weighted average cost of
team facilitator, 17, 90, 91, 119, 120, capital
121, 125, 127, 132, 134, 135, 136, Ward, 38, 44
138, 156, 161, 163, 165, 166, 170, weighted average cost of capital, 75,
176, 178, 181 96, 97, 98
transitivity, laws of, 131 Whitley, 153
transparency, 181 working capital, 184, 185, 186, 187
Tversky, 125, 126 treatment of, 95–6