Proper time horizon for projects
Proper time horizon for projects
(OP)
I have a big "selling" job to do, to justify an approximate $8 million dollar investment for a sorter in a distribution firm. I have a very good rate of return, 22% after tax, if I use a 15 year time horizon, which is very much in keeping with the equipment capability and our own past practices with such equipment.
In fact the project would involve replacing an aging 24 year old piece of equipment mnow used to sort the items in question.
However, our corporate finance people insist that such equipment investment projects use strictly a 5 year horizon, and in this short term light, the return is actually negative.
Does anyone know of references in the literature I could research to get our financial "wizzes" to budge on this?
I have tried appealing to their common sense, even gave a comparison to an electric utility I am familiar with which uses 18 and 20 year time horizons, but to no avail, I am guessing they do not possess any common sense, but have locked themselves into a mental strait jacket on this..
In fact the project would involve replacing an aging 24 year old piece of equipment mnow used to sort the items in question.However, our corporate finance people insist that such equipment investment projects use strictly a 5 year horizon, and in this short term light, the return is actually negative.

Does anyone know of references in the literature I could research to get our financial "wizzes" to budge on this?
I have tried appealing to their common sense, even gave a comparison to an electric utility I am familiar with which uses 18 and 20 year time horizons, but to no avail, I am guessing they do not possess any common sense, but have locked themselves into a mental strait jacket on this..





RE: Proper time horizon for projects
Their job is to set priorities for how to spend a limited resource, capital. If you only had 8MM to invest and one project paid a return in five years and the other fifteen where would you spend your money?
Having said all that I'll tell you about a project I did with exactly the same problem. In fact, my first conclusion was not to do the project but I got so much flack from my colleagues I had to go back and convince management I made a mistake. Assuming that you've inflated and extrapolated all the cost streams associated with the equipment and there is no room there. The "mistake" I made was not projecting the cost of replacing the machine in the future. At some point it has to be replaced, right? I put the future cost of replacemnt into my cost avoidance stream. At the time inflation was 4% so I compound inflated the present cost five years, included that avoided cost in the analysis and my return went positive big time. Now you're arguing engineering; is the machine dead in five years or isn't it; not accounting. Good Luck
RE: Proper time horizon for projects
HAZOP at www.curryhydrocarbons.ca
RE: Proper time horizon for projects
As far as I know 5 years used to be quit an exceptable time limit. Today with the advancement of technology and new products I would say that 5 years is too risky.
You may use my colleagues advise of including substantial "scrap value" for the sorting machine at the end of 5 years.
I would suggest that you reconsider your proposal and find new processing technology and resources that cost less and results with ROI in less than 5 years.
There is no one solution to any problem.
RE: Proper time horizon for projects
HAZOP at www.curryhydrocarbons.ca