The Split-Screen Approach for Project Appraisal (Part I: The Theory)

Abstract

This paper illustrates an innovative approach to financial modeling of engineering decision-makingand industrial projects. The approach is a minimal one, grounded as it is on three notions, twolaws, and one matrix that combines them, called Split-Screen Matrix (SSM). This split-screen approachconsists in linking the accounting and financial input data and systematizes them into the SSM, whosecolumns report the pro forma book values of capital (balance sheets), the corresponding incomecomponents (income statements), and the associated cash flows (cash-flow statements) while the rowsshow the project’s dynamical evolution. The SSMs are then linked via a continuous split-screen strip.To appraise the project, we use a pair of SSMs, namely, the project matrix and the benchmark Matrix(with the related strips), the latter containing the alternative amount invested and the associatedforegone profit of a financial portfolio replicating the project’s cash flows. Using differences betweenthe corresponding elements of the two strips, the economic profitability of the project can be easilymeasured, in both absolute terms (e.g., net present value, market value added, residual income) andrelative terms (e.g., average return on assets, cash-flow return on capital). The accounting-and-financeengineering system (AFES) obtained with the split-screen approach is particularly helpful when usingspreadsheet modeling because it does not require (knowledge and) use of financial spreadsheetfunctions. The application of this approach on spreadsheet modeling is essentially based on thecontinuous split-screen strip, here described, and is illustrated in a following paper (Baschieri andMagni 2023, “The Split-Screen Approach for Project Apraisal (Part II: Spreadsheet Modeling)”).