Why is it vital to review past investment appraisals for ongoing projects?

Reviewing past investment appraisals for ongoing projects is vital to assess performance, manage risks, and inform future decisions.

Investment appraisal is a crucial part of the decision-making process in any business. It involves evaluating the attractiveness of an investment proposal, using methods such as net present value (NPV), internal rate of return (IRR), and payback period. These appraisals provide a snapshot of the potential profitability and risks associated with a project at a particular point in time. However, as projects progress, circumstances can change, and the initial assumptions made during the appraisal may no longer hold true. Therefore, it is essential to review past investment appraisals for ongoing projects.

Firstly, reviewing past appraisals allows businesses to assess the performance of a project. By comparing the actual outcomes with the projected ones, businesses can determine whether the project is on track to meet its financial objectives. If the project is underperforming, the review can help identify the reasons behind this and suggest corrective actions. On the other hand, if the project is outperforming expectations, the review can highlight the factors contributing to this success, which can be replicated in future projects.

Secondly, past investment appraisals can help manage risks. Projects often involve significant financial commitments and carry a degree of risk. By regularly reviewing past appraisals, businesses can monitor these risks and take timely action if they escalate. For example, if the actual costs are significantly higher than the estimated ones, it may indicate a risk of cost overrun, prompting the business to revise its budget or reconsider the project.

Lastly, past investment appraisals can inform future decisions. They provide valuable insights into the accuracy of the business's forecasting and appraisal methods. If the actual outcomes consistently deviate from the projected ones, it may suggest that the appraisal methods need to be refined. Moreover, the lessons learned from past appraisals can guide the business in making more informed decisions about future investments.

In conclusion, reviewing past investment appraisals for ongoing projects is a critical practice in business management. It enables businesses to assess performance, manage risks, and make better-informed investment decisions.