Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
A project has a zero rate of return for an enterprise when the IRR is equal to the projected cost of funds over the term of the project.  Thus if the IRR for a project is 8%, but the enterprise can only borrow at 8%, then there is no point in proceeding from a return on investment point of view.

In practice, companies also factor in risk factors when evaluating projects - e.g. project cost over-run, project benefits under-delivery, or interest rate rises over the lifetime of the project and often set a minimum IRR rate (often 10%) or payback period as a matter of policy.

Projects are also generally evaluated within the context of an overall capital budget which is considered financially or strategically desirable for a company.  I.e. How leveraged does a company want to be?  Are there other projects with a better estimated IRR?  How strategic is the proposed investment?  How related is it to a company's core business?

I have seen some absolutely crap projects approved because they were sold as a good strategic fit by an influential director whilst many potentially good projects are passed up because the project sponsor hasn't managed to "clear his lines" with key players in the approval process.

In my experience project appraisal processes are often quite rigorous (except in marketing) whilst post completion reviews are often "swept under the carpet" where objectives were not met.

PS - you added "frontpaged by" to my Irish Election post - but it doesn't appear on the front page.  Do you want me to use that diary to live blog results as they come in tomorrow, or do you want to set up a separate open thread?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Feb 25th, 2011 at 08:03:03 AM EST
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