Investment Projects: An applicability analysis in Portugal

Following the thread of the paper Evaluation of Investments in Portuguese Firms [1], which presents a survey instrument applied to firms in the district of Guarda (Portugal) in the period March to May of 1998. The authors intend to analyze the development of the methodologies used in the evaluation of investment projects, focusing on the universe of firms previously studied, using the same inquiry, in the period January to June of 2001. The object of this paper is to contribute to this debate, revealing how Portuguese firms approach the application of investment project appraisal, as well as analysing their investment decisions and strategies within the last years, particularly 19962000, in the framework of the European Union. 1. Theoretical framework and antecedents In the paper Evaluation of Investments in Portuguese Firms [1], the authors tried to analyse the developments of the different methodologies of evaluation of investment projects in the firms of the district of Guarda (Portugal), as well as their increasing use by those responsible for these firms. Thus, the paper centres on the topic of investment management, based on projects in which investment appraisal methodologies are employed. The assumption of these projects is that the investment activity is under certainty conditions and without risk analysis. In fact, investment increases the capital of a community and has two important roles at the macro-economic level: first, it is the volatile and bulk component of costs and, second, represents the capital accumulation and the construction of a fixed capital. The result in a firm that makes a bad choice in selecting and evaluating a project can be strategically and financially devastating. Special care needs to be taken with investment decisions, notably in a region and country with lower developed macroand micro-economic environments. Investment management covers decisions of strategic, business, management and tactical natures which are of concern for all projects. For each investment, the firm can elaborate an investment project with specific details of the proposal involving the collection of data and all kinds of information that describe its technical, economic, financial and other characteristics. In this area, there is the danger of spending too much time, hence the authors' proposal to establish objectives balancing results, costs and time. Project evaluation, among other areas, involves the application of specific appraisal methodologies with the main objective of accepting, rejecting, and/or requesting further information about a project, at the various authorization levels in the firm's organizational hierarchy. The authors classify as principal traditional investment appraisal methodologies: accounting rate of return, total assets, payback period, net present value, profitability index and internal rate of return. On other hand, sophisticated investment appraisal methodologies include: net present strategic value, mathematical programming, probabilist methods, sensitivity analysis among other methods. The authors will not focus on the problems, limitations and difficulties inherent to each methodology, but their lack of discussion here does not diminish their importance, particularly given the fact that our results point to their relevance. This paper aims to analyze the development of the methodologies used in the evaluation of investment projects, focusing on the universe of firms previously studied, using the same inquiry. Through this instrument, every effort has been made to promote all investment appraisal methodologies. Finally, possible explanations and deficiencies will be presented for the erradication of certain “less correct” practices also identified in the first study. 2. Data and research techniques The methodology used in this study of firms of the district of Guarda, within the 12 municipalities, included a survey carried out during the months of January to June of 2001, sent by mail, since it is an efficient manner in trying to contact a great number of firms that are dispersed over a significant geographical area and it does not introduce any subjectivity in the process. This survey was directly administrated, more specifically the inquiree wrote his/her reponses [11], since the period of time available to collect the data was scarce, but with the understanding that this process is not trustworthy (...) since the questions can be wrongly interpreted and the number of responses is generally very low [11]. On the other hand, this survey type, comprised mainly of closed multiple-choice answers, is favored in the interest of obtaining data for temporal and spacial comparison. This inquiry was distributed through sector-based associations, such as the Commercial Association and the Industrial Association, with the objective of obtaining a superior rate of reponse to that of the first survey, which was 19%, corresponding to 30 firms of a universe of 158.