Project screening and ranking

Project screening means checking that the predicted economic performance of a project passes a prescribed threshold or hurdle . Investors commonly apply a screening value to the project, which is a chosen IRR at a chosen oil price (for example, 20% IRR at 20/bbl). Provided the project IRR exceeds the hurdle rate the project is considered further, otherwise it is rejected in current form. 

With unlimited resources, the investor would take on all projects which meet the screening criteria. Project ranking is necessary to optimise the business when the investor s resources are limited and there are two or more projects to choose between. 

At discount rates less than 18%, Proposal 1 is more favourable in terms of NPV, whereas at discount rates above 18%, Proposal 2 is more attractive. NPV is being used here as a ranking tool for the projects. At a typical cost of capital of, say, 10%, Proposal 1 

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