The chapters covered till now provided us with the basic tools and techniques needed to evaluate projects. In particular, chapters 2 to 6 showed us how to calculate net present values and how to use them to make capital budgeting decisions. Chapters 7 to 9 explained how the risk of a project affects the discount rate that should be used to evaluate it. However, investment decisions require a lot more than the knowledge of tools and techniques. There are a number of practical issues to be considered. A manager should be able to understand what is going on inside a project. Detailed project analysis enables a manager to understand the vulnerabilities, strengths and weaknesses of a project. Chapters 10, 11, and 12 deal with these issues. These chapters address specific questions such as how to analyze capital investment projects, how to ensure that cash-flow forecasts are realistic, and how to organize and control capital expenditures.

The title: “A Project Is Not a Black Box,” clearly brings out the central theme of the chapter. A black box is something that you accept without questioning what is inside. A financial manager should not simply accept a set of cash-flow forecasts, choose a discount rate, and crank out a net present value. She must understand the internal workings of the project and think about where those cash flows came from and what can go wrong with them. Chapter 10 describes five commonly used techniques of project analysis which can help the financial manager understand the project’s structural strengths and weaknesses, its dependence on one or more key inputs, and interrelationships the project might have with future decisions. The techniques described are: sensitivity analysis, scenario analysis, break-even analysis, the Monte Carlo simulation, and decision trees.

The chapter also provides an overview of real options associated with projects. Managers and companies are not passive investors in the investment projects undertaken by the company. Managers have the ability, intention and resources to continually monitor projects as they proceed and will modify the projects to adapt to the changing conditions in the market. This ability to modify projects means real options linked to projects and these options need to be evaluated as part of the project evaluation process.