:AACE CERTIFICATION 2009-2010:

Investment Decision Making

One of the important processes of the Company Investment is the decision making part. Lots things need to be considered, addressed and analyzed either internal or external requirement prior the decision maker coming to the conclusion to say go or not go, hold, decelerate or accelerate the investment.

Investment decision making is a process to analyze investment alternatives and determine whether, how and when to allocate the enterprise’s limited resources to them. Investment decision making generally addressed during company enterprise planning which is in PT Inco case, during annual capital planning and budgeting.

Valeinco has 2 stages of investment decision with regards to the management area decision makers. The 1st stage is the business unit across Valeinco organization to initiate the capital project by creating a project justification through project business case that we called Project Investment Plan. Project business case is basically the outcome of the project feasibility study which is initiated upfront by respective operating area. In the business case form submission, the project sponsor and owner has to provide a justification including the step of decision making why they choose the projects. The project sponsor and owner has to state what is the problem statement, develop the alternatives and select the best alternatives and the analysis why they choose the alternative considering the company strategic imperative, what is the criteria assessing the return on investment, quantify value and risks. The project selected will then be presented in the PT Inco business Unit capital selection called capital risk ranking process. The process is basically to assess and review the project among all of the projects submitted and make a decision whether the project proposed is worth to be executed or not.

Figure 1. PT Inco Capital Risk Ranking Process1

The basic question in the capital risk ranking process is basically whether a proposed capital investment and its associated expenditure can be recovered by revenue or saving overtime in addition to return of the capital that is sufficiently attractive in view of the risks involved and potential alternative uses.

When I read Engineering Economy Chapter 1, section 1.3, page 26-27, it’s obvious that PT Inco actually did the right way to select the best capital investment. In the engineering economy theory, there are 7 (Seven) steps procedure to be used to assist decision making as follows2:
1. Problem recognition, definition and evaluation.
PT Inco business case and risk ranking also state for the project initiator to well understand what the problem was and what the risk is if PT Inco not doing the project proposed and evaluate the problem with regard to the company strategic imperative.
2. Development of the feasible alternatives
It is developed through feasibility study with the outcome with some alternatives solution available with 2 primary actions; (1) searching for potential alternatives and (2) screening them to select a smaller group of feasible alternatives.
3. Development of prospective outcome
Using a common unit of measurement to enumerate as many of prospective outcome as possible in relate to the cash flow calculation.
4. Selection of decision criteria
At PT Inco, decision criteria will normally refer to the company strategic alignment which is project impact to the cost and production target, Safety Health and Environment, Company reputation, Social and regulatory & compliance.
5. Analysis and comparison of the alternatives
The project alternatives will the be analyzed by the risk ranking team
6. Selection of the preferred alternatives
The ranking process outcome is the chosen alternative, which is the project has a very high profitability return considering all aspect in the company strategic alignment include and capital fund limitation.
7. Performance monitoring and post evaluation results
Monitoring of the project and post evaluation to make sure the project achieve its objective and give a desire result stated in the project business case. This process is not consistently implemented in PT Inco organization.

Once the projects pass the risk ranking process and selected as project nominated to be executed in the PT Inco business unit, then the 2nd stage is to submit all of projects selected for the next project selection called Capital Portfolio Management process. The process is actually similar with the previous process but the portfolio team will review and assess the projects among entire valeinco organization.

Figure 2. Valeinco Portfolio Management Process3

Now comparing with Total Cost Management Framework, in the chapter 3.3 Investment Decision Making Page 55-56, Its stated that decision policy is customarily decomposed along 3 (three) dimensions:
1. Investment objectives
2. Time value
3. Risk attitude
Those 3 policies are exactly mentioned of the project of the project capital investment selection and basically typical process mentioned the Engineering Economy theory and Valeinco capital selection process as described above.

Figure 3. Process Map for Investment Decision Making4

The process map also showing up the process where all of the decision making input will end up with the output of project business decision basis. The input includes, project requirement or problem statement, project alternatives, risk factors and historical information. Tools and techniques is basically a common model to review the investment by quantify the scope, costs, value and others and at PT Inco called PT Inco risk ranking process and capital portfolio management process at the corporate level.

In summary, the investment decision making is practically implemented at PT Inco organization as business unit and Valeinco in the corporate level. There are some process, policy and methodology coming from Engineering Economy and Total Cost Management Framework that can be adopt to improve the current decision making process. One of the steps that still not consistently implemented at PT Inco level is the Investment performance monitoring and post evaluation of investment results. I have plan to put it in to the current process flow and determine the parties who accountable to get this done.

Sorowako, December 5th, 2009

1 PT Inco Project Engineering Business Process, Inception Phase Develop Capital Plan, Page 4 of 15, Author. Muhammad Asril
2 Engineering Economy 14th Edition, Chapter 1, Introduction to Engineering Economy, section 1.3. Page 26-27
3 Valeinco Portfolio Management Process, Valeinco Presentation Slide Page 2 of 20, Author. Tyler Mitchelson
4 Process Map for Investment Decision Making, Total Cost Management Framework, Chapter 3.3 Investment Decision Making, Page 58