4 - Contracting options and investment appraisal techniques

Question 1

Name 4 types of management and contracting options

Answer 1

Client co-ordinated contracting - supplier carry out work to spec
Engineering, procurement & construction – contractor manage whole project, 2 approaches – full turn-key, partial turn-key
Management contracting – contractor manages and co-ordinates design and construction
Build, Own Operate, transfer (BOOT) – public sector, construction, operational, financial package

Question 2

What is a Public Private Partnership?

Answer 2

Umbrella term – an arrangement between the public sector and the private sector. Transfer risk
Helps finance public sector services, provides skills/knowledge/ expertise

Question 3

What investment appraisal techniques can you use to evaluate different projects?

Answer 3

Payback Analysis,
Average Rate of Return,
Time Value Money,
Discount Rate, 
Internal Rate of Return

Question 4

What is Time Value Money?

Answer 4

Inflation erodes the value of money over time therefore discounted cash flow techniques must be used.
Brings current and future cash to and equivalent value today – Net Present Value (NPV)

Question 5

What is discount rate?

Answer 5

Used to determine the present value of future cash flows – takes into consideration time value of money but the risk (e.g. inflation) or uncertainty of future cash flows.
Finance function will provide figure (based on how much it costs the org to raise the required finance
Pro – detailed, considers timing of cash flow, cost of funding
Con – complex on long projects

Question 6

What is Internal Rate of Return?

Answer 6

Metric used in measuring the profitability of potential investments
IRR is a discount rate that makes the net present value of all cash flows equal zero.
Con: higher yield doesn’t mean better investment