Allocate scarce capital
Compare projects by incremental cash flows, timing and scarce resources. When capital is limited, a project can pass its own hurdle and still lose to a better use of the same capacity.
Worked example
A food plant can fund one line. The wholesale line brings early contracted orders but slower collections. The retail line pays sooner and needs larger finished-goods inventory. Compare cash tied up by month rather than ranking the two by invoiced sales.
Change the assumption
The wholesale line has higher expected profit, but its receivables peak just before the retail launch. What should the approval memo show?
Check the reasoning
Plot the combined monthly cash requirement and compare it with available funding. Test whether staging the launch or changing credit terms avoids a cash shortfall without giving up the more valuable opportunity.
Check your reasoning
What changes when projects can be sequenced?
Reveal the explanation
A pilot can preserve the option to fund the second line. Include the cost of waiting, equipment compatibility and whether the first project consumes the only specialist team.
Try the same framework in a different case
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