Development Projects

Development Projects: Are You Leaving Too Much Money On The Table?

How improving your management practices will reduce the risk of suboptimal NPV / IRR.

Net Present Value (NPV) and Internal Rate of Return (IRR) are key measures for organisations deciding which combination of options provide the optimal business outcomes.

A project is considered a failure if it did not at least meet its expected business value ‘On-Time, In-Full’ (OTIF). But what about those many marginal projects? From experience we know that there are many, many cases where a combination of circumstance and suboptimal practices have resulted in projects that might not be classified as failures but nevertheless, they failed to provide the full return to their investors.

Among other points, in their paper ‘The Use and Abuse of Feasibility Studies’, W Mackenzie and N Cusworth conclude that feasibility studies tend to focus on technical issues at the expense of critical business and project delivery issues. On the flipside, the following is an example of where the project teams managed to turn the game around from marginal/non-feasible proposals to extremely positive ones.

A North American producer with a potential gold mine in South America found themselves with such a marginal project. The initial feasibility study did not greatly attract investor confidence by posting moderate returns of 15% with a payback of 7 years. The developer could have proceeded on that basis, as yes it would make some money, but instead boldly decided to give the Feasibility Study one more go. The team managed to turn around what seemed to be a doomed value proposition, to a fully funded, now operational venture with returns exceeding market expectations. Less than a year later the team had:

  • Increased NPV by 25%,
  • Increased IRR by 155%,
  • Decreased Startup Capital by 60%, and
  • Reduced Payback from 7 to 3 ½ years

What’s going on here?

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