The FAP Model — The Net Present Value Profile (NPVP)

Abstract

While the traditional capital investment appraisal models, such as the NPV, are theoretical models from which normative decision rules can be derived, the FAP model offers a normative protocol that specifies the processes managers ought to follow to maximise the value of their investment choices. The NPV aims to identify those projects that will increase shareholder value by allowing for project risk through the discount rate used in its calculation and by increasing the cash inflows for the strategic benefits. It looks at those aspects of an investment decision that can be quantified in financial terms. The FAP model aims to address the wider aspects of an investment decision that will impact on the firm. Not only does it identify the implications for shareholder value from a given investment, but it also looks at the total issue of risk from a corporate management perspective. Because the FAP model (through the PRP — developed in Chapter 8) looks at a project’s specific risk from this perspective, it would be incorrect also to allow for ‘specific’ risk in the discount rate used in the NPV. For if it did, it would be allowing for risk twice. A firm is also concerned with its competitive strategic position through its capacity to create competitive advantages. So the FAP model (through the SI — developed in Chapter 9) highlights the strategic benefits looked for in each capital investment opportunity and then goes on to assess their ‘worth’ within each project.