What Is a Project Financial Evaluation?

by Bert Markgraf

A project financial evaluation tells you whether a project will contribute to your company's overall goals or be a drain on your resources. While complicated analysis techniques and computer programs can perform high-level calculations and provide you with advanced financial ratios and rates of return, you can carry out a few simple calculations to determine whether the project makes financial sense. You can then decide whether to perform a more detailed analysis.


For a financial evaluation to help you decide whether to proceed with a project, you have to first establish your overall goals. Decide whether the project has to immediately make a contribution to the bottom line or whether you are taking a longer-term view. Decide how profitable it has to be compared with other attractive projects you could undertake or whether a marginally profitable project makes sense because it achieves other positive goals. The financial evaluation gives you a financial result, but you have to decide whether that result is attractive enough to proceed with the project.


Although you may be able to pay for the project with funding from your company, the financial evaluation assumes the project stands on its own and has to finance itself. To get the total financing costs, you have to take the projected costs of the project as you would incur them and add them to a theoretical loan at the current interest rate for such financing. As the project adds more costs, add the interest on the amounts already paid out to the total financing amount. Upon completion of the project, it has a financing cost equal to the total cost of the project plus the interest charges for the construction period.

Cash Flow

Once in operation, the project generates revenue and pays out its operating costs. For each year of operation, you have to estimate how much revenue you predict for the project and what you think the operating costs will be. The difference is the cash flow available for debt servicing. For a complete financial evaluation, these calculations are required for every year of the expected life of the project, but you can start your evaluation with the calculations for the first few years.


From the total financing cost, you can get the annual payments required to service the debt. From the cash flow calculations you have the amounts available for debt servicing. Your overall goals tell you how to structure the evaluation. If you want immediate profit, you can stretch out debt repayment and determine how much money is left over in the early years of operation. If you want a steady income, you can make equal payments on the debt and calculate what the steady profit would be. If you want high future income, you can use all the cash flow to retire the debt quickly and calculate how much money you will make a few years down the road. This process lets you tailor your financial evaluation to your goals and decide whether the project meets your specific requirements.

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