Types of Capital Projects

Going Concern Projects

There are two types of replacement decisions:

• Replacement decisions to maintain a business. The issue is twofold: should the existing operations be continued? If yes, should the same processes continue to be used? Maintenance decisions are usually made without detailed analysis.
• Replacement decisions to reduce costs. Cost reduction projects determine whether to replace serviceable but obsolete equipment. These decisions are discretionary and a detailed analysis is usually required.

The cash flows from the old asset must be considered in replacement decisions. Specifically, in a replacement project, the cash flows from selling old assets should be used to offset the initial investment outlay. Analysts also need to compare revenue/cost/depreciation before and after the replacement to identify changes in these elements.

Expansion of Existing Business

Projects concerning expansion into new products, services, or markets involve strategic decisions and explicit forecasts of future demand, and thus require detailed analysis. These projects are more complex than going concern projects. Risks involved are low to moderate.

New Lines of Business and Other

Such investments usually involves more stakeholders and higher degrees of risk.

Regulatory/Compliance

These projects are mandatory investments to meet safety, compliance, regulatory pr supervisory standards. They are often non-revenue-producing.