Article 591 Evaluating and Shortlisting Capital Investment Opportunities Using Profit Investment Ratio (PIR) and Risk Exposure Measures

When it comes to evaluating and shortlisting which capital investment opportunities an organization needs to consider selecting and investing in them as capital projects is the profit investment ratio (PIR) or value investment ratio (VIR) which is a capital budgeting measure that gauges the potential profitability of a capital project investment. The evaluation and shortlisting of initiatives that could be possibly considered for selection and execution will also take into account the risk or threats exposure associated with each opportunity.

The profit investment ratio (PIR) is calculated by dividing the net present value of future benefits by the initial investment cost of the project opportunity. The initial investment cost includes the costs of site acquisition, professional services cost, construction cost, marketing, legal and other type of costs needed to build the project. The net present value of future benefits includes all sources of revenue that the project will generate which will be adjusted by the costs of refurbishment and renewal, operation, maintenance and end of life or assets disposition.

The profit investment ratio (PIR) equals the Present Value of Future Benefits divided by the Initial Investment needed to build the project. A profit investment ratio (PIR) of 1 indicates breaking even, which is an indifferent result for the investor. If the result is less than 1.0, then this investment should be avoided whereas, If the result is greater than 1.0, then this investment should be considered and be further analyzed to support the decision on whether the investment should be selected as a project or not.

As for the opportunity risk or threats exposure, it will be based on the weighted risk exposure assessment for all risks or threats identified for the opportunity. The risk exposure will be based on score of 25 which is the multiplication of a risk that is almost to occur which will be 5 points and a has catastrophic impact if it occurs which will also be 5 points. A risk exposure below 9 points is considered low, between 9 and 17 is moderate and above 17 as high. Of course, the common sense would be the highest risk exposure will provide the highest profit investment ratio.

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Using a Project Management Information System (PMIS) solution that address the pre-project stage of capital investments like PMWeb will enable capturing the estimated initial investment costs as well as the anticipated benefits or revenues of the operation stage and costs during this stage. PMWeb initiative module allows capturing this estimate information and the investment life cycle schedule which will be associated with the cost and revenue estimates needed to calculate the net present value of future benefits. The module also allows setting the scoring criteria for which initiatives with a PIR is greater than will be analyzed against.

For the risk exposure analysis, it is recommended to use PMWeb custom form builder to create a simplified risk checklist template which will have all risk categories and items pre-defined along with the weight for each. Of course, there is also the option to use PMWeb Risk Analysis module if needed.

The attachment tab for the initiative and risk register checklist templates will be used to attach all those supportive documents. It is also highly recommended to add comments to each attached document to provide better understanding of what was the document for. The attachment tab also allows the user to link other records for business processes implemented in PMWeb, emails imported to PMWeb from designated email servers as well as associate URL hyperlinks with websites or documents that are not stored in PMWeb document management repository.

All those supportive documents need also to be uploaded into PMWeb document management repository so they can be stored and used. Those documents could be uploaded into folders or subfolders so they are better organized and secured. PMWeb allows setting access rights to each folder to identify the users who have access rights to view documents stored in a folder. In addition, PMWeb allows setting notifications for individuals to receive emails when new documents are uploaded or existing documents were downloaded or deleted.

To enforce accountability for all business processes required for the initiatives and risk assessment business processes, PMWeb workflow module will be used to create a workflow to formalize the review and approval tasks of those business processes. The workflow will map the sequence of the review and approval tasks along with the role or user assigned to the task, duration allotted for the tasks, rules for returning or resubmitting a document and available for each task. In addition, the workflow could be designed to include conditions to enforce the authority approval levels as defined in the Delegation of Authority (DoA) matrix. It should be noted that those will who be involved in those workflows could include other members of the organization that are not part of the project management team.

When any of those business processes is initiated, the workflow tab available on the template will capture the planned review and approve workflow tasks for each transaction as well as the actual history of those review and approval tasks. PMWeb will capture the actual action data and time, done by who, action taken, comments made and whether team input was requested.

The Profit Investment Ratio (PIR) and Risk Exposure report will include filters to enable stakeholders to select only those initiatives that have a PIR value that is more than 1.00 as well as a risk or threats exposure below 19 or those with low or moderate exposure. The selected filter will automatically adjust all visuals and reports included in the report to only display the information relevant to the selected initiatives.

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About the Authorfounder

Bassam Samman, PMP, PSP, EVP, GPM is a Senior Project Management Consultant with 40-year service record providing project management, project controls services and project management information system to over than 200 projects with a total value in excess of US $100 Billion. Those projects included Commercial, Residential, Education and Healthcare Buildings and Infrastructure, Entertainment, Hospitality and shopping malls, Oil and Gas Plants and Refineries, Telecommunication and Information Technology projects. He is thoroughly experienced in complete project management including project management control systems, computerized project control software, claims analysis/prevention, risk analysis/management (contingency planning), design, supervision, training and business development.

Bassam is a frequent speaker in topics relating to Project Management, Strategic Project Management and Project Management Personal Skills. Over the past 40 years he has lectured at more than 350 events and courses at different locations in the Middle East, North Africa, Europe and South America. He has written more than 500 articles on project management and project management information systems that were featured in international and regional magazines and newspapers. He is a co-founder of the Project Management Institute- Arabian Gulf Chapter (PMI-AGC) and has served on its board of directors for more than 6 years. He is a certified Project Management Professional (PMP) from the Project Management Institute (PMI), a certified Planning and Scheduling Professional (PSP) and Earned Value Professional (EVP) from the Association for the Advancement of Cost Engineering (AACE) and Green Project Management (GPM).

Bassam holds a Masters in Engineering Administration (Construction Management) with Faculty Commendation, George Washington University, Washington, D.C., USA, Bachelor in Civil Engineering – Kuwait University, Kuwait and has attended many executive management programs at Harvard Business School, Boston, USA and London Business School, London, UK.


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