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Making the Right Investment Decisions

Making the Right Investment Decisions to develop or acquire new capital assets should be made on complete information evaluated via a feasibility process. By necessity the information is never final, hence due to this uncertainty, no investment decision is without risk.

What is at issue is that the systematic evaluation processes used, and the definition standards to be achieved, should ensure the evaluations are complete and to a known quality.

During the 90’s and even more recently, the media have reported on a number of large projects and acquisitions that could only be described as technical and economic disasters. These well publicised investments destroyed shareholder value and resulted in challenges to Boards and Management of many resource companies.

Capital Investment Systems incorporating defined processes and standards have now evolved to meet these challenges.

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This paper sets out the experiences of Neil Cusworth, Managing Director of Enthalpy, relating to the Best Practices now being used or developed to make Capital Investment decisions.

The costs and efforts needed to define any new capital asset development or acquisition utilise the resources available from shareholders’ investments. If the intended development or acquisition proceeds, then the investigation costs add to the costs of the new development or acquisition. Alternatively, if the intended development or acquisition does not proceed, then the shareholders’ funds are lost or reduced in value.

Yet to grow or sustain a business, investments must be made. The challenge then is to decide how much of shareholders’ funds should be put at risk, prior to the investment decision, in seeking to define the investment. The alternative is to take higher risks during the delivery of the development project or purchase of the existing business or asset.

Over the past fifteen years too many examples of investment decisions which did not deliver the promised values have been witnessed in the resource and industrial sectors.