The Development of the FAP Model

Abstract

It is clear from the literature that managers prefer, when evaluating any single investment proposal, to use a number of financial appraisal and risk assessment models rather than rely upon any single model, no matter how much that model may be theoretically justified. We believe, however, that the use of any single appraisal model can lead, in certain instances, to adverse selection, as subordinate managers learn to modify their projections to maximise the acceptability of their proposals by overstating benefits and minimising costs and risks. We would argue that a multi-appraisal regime would be useful in mitigating such behaviour. There is also evidence to show that techniques developed for both the assessment and treatment of risk are not as widely used as some would like to believe. This may indicate that the issue of risk is not taken seriously by some organisations. There also appears to be little consensus as to which models should be used when a combination modelling approach is adopted. Each model has some unique quality to offer the decision-maker; however, inappropriate combination modelling may lead to confusion and overcompensation for such factors as, for example, project-specific risk.