Risk-weighted cash flow: a communication tool for engineers and financial professionals on new technology projects

CIM Journal, Vol. 3, No. 4, 2012

M. Kennedy Norwegian University of Science and Technology, Trondheim, Norway C. Harris Accenture, Toronto, ON A. MacRae MacRae Technologies, Inc., Hayward, CA

New technology projects, particularly those involving first-of-a-kind metallurgical facilities, have poor track records achieving overall financial targets. Associated risks include slow start-up, slow ramp-up, and failure to achieve design performance (quality or throughput), which affect cash flow and net present value (NPV) or internal rate of return (IRR). Applied discount rates often lack adequate provision for technological risk. In this paper, the authors will examine project risk and new technology and their role in achieving predicted cash flows. Addressing technological risk using risk-weighted returns can prevent marginal projects and give sound projects additional time and resources for optimal front-end loading (FEL)—the level for maximum risk-weighted NPV (rNPV).