The paper surveys the present state of knowledge about the appraisal and control of capital projects, and identifies the useful contribution which actuaries can make to the process.
Relevant theoretical considerations are discussed, including the choice of appropriate discount rates for use by companies when screening proposals. It is recommended that discount rates should be lower than those commonly used. Some practical working methods are summarised and examples are given of how risk analysis can be carried out, for both simple and complex appraisals. Attention is drawn to the special ‘social’ considerations which may apply in the case of Government projects. The opportunities now opening up for joint ventures between the UK Government and private sector partners are examined, and it is concluded that proper sharing of costs and risks can facilitate arrangements which are acceptable to both sides.
The paper concludes with a discussion of the procedures which companies can use to identify, appraise, control and monitor projects.