Capital Budgeting Essay Example | Topics and Well Written Essays - 3250 words

Capital Budgeting - Essay Example The management has the option of employing different techniques for evaluating the performance of individual project managers, each of which has its own characteristics. This paper makes a critical analysis of the performance evaluation technique adopted by Brand Neue Corporation and suggests that the project creating positive shareholder value based on Economic Value Added (EVA) calculation is to be accepted for providing overall greater bonus to the project manager. Organizations adopt both financial and non-financial metrics for evaluating the performance of senior managers. Many of the companies use performance measures such as operating income which rely mostly on financial information generated internally within the organization and are therefore are deficient in making the evaluation perfect. In order to overcome this problem firms have started combining both financial and non-financial measures in the form of balanced scorecards specifying different elements such as profitability measures, customer satisfaction measures, internal measures of efficiency, quality and time and innovation measures. The measures incorporate both long-term and short-term horizon in the evaluation. The internal financial measures are normally based on the accounting numbers routinely prepared and reported by the organization. The idea behind evaluating the performance of different projects is not only to judge the profitability of the projects but also to provid e a meaningful basis for compensating and motivating the senior managers. The objective of this paper is to analyze the project performance appraisal techniques adopted by Brand Neue Corporation. This company has been working on three projects, the performance of which was under review. The company was using ROI technique for evaluating the performance of the projects based on which the performance of the project managers was assessed for compensating them. However the evaluation technique was changed to EVA, since the management was convinced that some of the project managers have been accepting or rejecting projects based on their current ROI status in relation to the bonus structure of the firm. One of the projects was in jeopardy as the project evaluation has not considered the cost of clean up to be incurred consequent upon the passing of an environmental legislation. The cleaning cost has made the project unviable. Therefore the management wants to have a relook at the different project performance evaluation techniques. This report will analyze the effectiveness of the capital budgeting and performance evaluation techniques adopted by Brand Neue such as Return on Investment (ROI), Residual Income (RI) and Economic Value Added (EVA) and recommend to the board of directors, the best technique for evaluating the performance of the managers. The report will also substantiate the recommendation of a particular technique and the likely issues the management has to consider in the process of evaluation. This paper is organized to present theoretical aspects of the evaluation techniques, comparison of the performance evaluation under different techniques and finally a recommendation on the technique that the management can adopt. Project Performance Evaluation Techniques The objective of performance evaluation systems is to provide the information feedback loop to the