The FAP Model and Its Application in the Appraisal of ICT Projects

239 Pages·2015·2.9 MB·English

by  Frank Lefley

The FAP Model and Its Application in the Appraisal
of ICT Projects
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The FAP Model and Its
Application in the
Appraisal of ICT Projects
Frank Lefley
HonoraryResearchFellow,UniversityofHradecKrálové,CzechRepublic
©FrankLefley2015
Foreword©JosefHynek2015
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inaccordancewiththeCopyright,DesignsandPatentsAct1988.
Firstpublished2015by
PALGRAVEMACMILLAN
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ISBN978–1–137–44351–9
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Lefley,Frank,1943–
TheFAPmodelanditsapplicationintheappraisalofICTprojects/FrankLefley.
pages cm
Summary:“Variousformaltechniquesareusedfortheanalysisofcapitalprojects,
butareoftenlimitedbytheirscopeandbythedifficultyofinterpretingthe
significanceoftheresultstheyproduce.Manyperceivedbenefitfactorsareleft
outofexistingappraisalprocessesbecausetheylackprecisefinancial
quantification.Significantlyrevisedandrewritten,basedonthe2005publication
TheFinancialAppraisalProfileModel;thisbookdiscusseshowtheFAPmodelcan
presentanintegratedprocessfortheappraisaloffinancialandstrategicbenefits
andtheassessmentofriskinICT(InformationCommunicationTechnology)project
proposals.Itpresentsapragmaticsolutiontoresolvemanyoftheproblemsfaced
byorganisationsconsideringinvestment,notonlyinICTbutinallmediumtolarge
scaleprojects.ThebookdemonstrateshowtheFAPmodelprogressestheliterature
andpracticeofcorporatefinancebyprofilingthefinancial,riskandstrategic
elementsofaninvestmentdecision.Includingareviewofotherexistingfinancial
riskandstrategicappraisalmodels,thisbookexplorestheperceptionthatICT
projectshavedifferentrequirementstoothers,andhighlightsimportantissues
regardingICTglobalisation,projectchampions,postauditsandappraisalteams.
Thiscomprehensivecase-study,basedonresearchinapplyingtheFAPmodeltoan
ICTcapitalproject,addressesissuessuchas‘groupthink’andtheinfluenceof
a‘projectchampion’ontheevaluationofcapitalprojects.”—Providedbypublisher.
ISBN978–1–137–44351–9(hardback)
1. Capitalinvestments. 2. Informationtechnologyprojects—Evaluation.
3. Capital—Accounting. 4. Valuation. I. Title.
HG4028.C4L38572015
658.15(cid:2)2—dc23 2015002380
To Andrew
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Contents
ListofTablesandFigures viii
Foreword xi
Acknowledgements xiii
AbouttheAuthor xv
ListofAbbreviations xvi
1 Introduction 1
2 ThePerceptionThatICTProjectsAreDifferent 21
3 TheAppraisalofICTandNon-ICTProjects:AStudyof
PracticesofLargeUKOrganisations 34
4 EvaluatingICTProjectRisk:AnExploratoryStudyofUK
andCzechRepublicPractices 68
5 TheDevelopmentoftheFAPModel 82
6 TheFAPModel–BasicData 92
7 TheFAPModel–TheNetPresentValueProfile(NPVP) 100
8 TheFAPModel–TheProjectRiskProfile(PRP) 113
9 TheFAPModel–TheStrategicIndex(SI) 128
10 SummaryCommentsontheFAPModel 144
11 ApplyingtheFAPModeltoanICTProjectwithina
ProfessionalAssociation 152
Appendix1:TheAccountingRateofReturn 182
Appendix2:CalculatingtheModifiedInternalRateofReturn
fromtheNetPresentValue 188
Notes 193
Index 216
vii
Tables and Figures
Tables
2.1 Opinionstatements 27
2.2 Reasonsgivenfornotcarryingoutaformalappraisalof
allICTandnon-ICTprojects 29
2.3 FinancialmodelsusedinappraisingbothICTand
non-ICTprojects 30
2.4 Methodsusedtoassessand/ortakeaccountofrisk:ICT
andnon-ICTprojects 32
3.1 Lengthofrespondentsservicewithcurrentemployer
(years)(n=71) 39
3.2 Formalappraisal(n=71) 42
3.3 Reasonsgivenfornotcarryingoutaformalappraisalof
allICTandnon-ICTprojects 42
3.4 Departmentalinfluence 49
3.5 Formal/informalassessmentoffinance,risk,and
strategicfactors 51
3.6 Financialmodelsusedinappraisingthemostrecent
ICTproject(n=71) 53
3.7 Financialmodelsusedinappraisingthemostrecent
non-ICTproject(n=67) 54
3.8 Factorstakenintoaccountwhendeterminingthe
discountrate 55
3.9 Methodsusedtoassessand/ortakeaccountofrisk 57
3.10 Otherfactorsconsideredduringtheprojectselection
stage 60
4.1 Approachesusedtoassessand/ortakeaccountofrisk 71
4.2 Statisticalanalysisofresponsestoopinionstatements 79
6.1 Thecapitalcostforaprojectwithafour-yearset-up
time(a) 93
6.2 Thecapitalcostforaprojectwithafour-yearset-up
time(b) 94
6.3 Thecapitalcostforaprojectmitigatedbya100%first
yearallowance(FYA)and40%corporationtaxliability 95
7.1 CalculationoftheNPVP 105
7.2 NPVP 107
viii
ListofTablesandFigures ix
7.3 ComparisonofthePBandDPBmodels 109
7.4 NPVPsoffourprojects,allwiththesameNPV 111
8.1 Calculationofthe‘agreed’riskprobabilityandimpact
valuesforkeyriskelements 123
8.2 CalculationofdepartmentalRV 124
8.3 DeterminationofthePRP 125
9.1 Corporaterankingofkeystrategicbenefits–Pairwise
comparisons 138
9.2 Corporaterankingofkeystrategicbenefits–
Computationofnormalisedweights 138
9.3 CalculationofthePSSV 141
9.4 DeterminationoftheSI 141
11.1 TheITscore(basedonoptimumselection:Supplier
HS1andSupplierD1) 159
11.2 NPVP–CalculationoftheNPVP 160
11.3 PRP–Suggestedriskprobabilityandimpactvalues–
FirstDelphiround(identificationofproject-specific
risks) 162
11.4 PRP–Suggestedriskprobabilityandimpactvalues
(informationreceivedfromsecondDelphiround).
Exampleofdocument 164
11.5 PRP–Suggestedriskprobabilityandimpactvalues–
Finalaftergroupmeeting 166
11.6 PRP–Calculationofriskprobabilityandimpactvalues
forkeyriskelements 167
11.7 PRP–CalculationofdepartmentalRVs 169
11.8 PRP–DeterminationofthePRP 170
11.9 SI–Corporaterankingofkeystrategicbenefits/areas
onascaleof1to10 170
11.10 SI–SuggestedPSSVs–FirstDelphiround 171
11.11 SI–SuggestedPSSVs–SecondDelphiround 172
11.12 SI–CalculationofthePSSVs–Finalaftergroup
meeting 173
11.13 SI–DeterminationoftheSI 173
11.14 TheFAP 174
A2.1 CalculatingtheMIRRfromtheNPV 190
A2.2 TraditionalmethodofcalculatingtheMIRR 192
Figures
3.1 Businesssectoranalysis 40
3.2 TypesofICTprojectsappraisedinlasttenyears 41