Cost-Benefit Analysis for Investment Decisions: Chapter 5 (Scale, Timing, Length and Inter-Dependencies in Project Selection)

It is generally agreed that a project's net present value (NPV) is the most important criterion for the financial and the economic evaluation of a project from either the owner's or economic perspective. The NPV criterion requires that a project analyst recommend only projects with positive NPV. The next step is to endeavor to maximize the NPV. The reason for trying to maximize the NPV is to extract as much value from the project as possible. Ideally, we should strive to maximize the NPV of incremental net cash flows or net economic benefits. Of course, optimization cannot be pursued blindly; there may be repercussions for other stakeholders that need to be considered in the final decision making. There are other important considerations project analysts often encounter. These considerations include changes in project parameters like the scale of investment, the date of initiation of a project, the length of project life or interdependencies of project components. Each of them is addressed in this chapter by using the criterion of a project's net present value. This chapter explains how project analysts use the criterion of a project's net present value to make such decisions.