Prioritising capital projects for maximum ROI

Learn how to prioritise capital projects for maximum ROI by assessing strategic alignment, financial impact, and risk. Discover practical frameworks that help finance leaders allocate capital more effectively and improve investment performance.

Before each financial year, businesses compile potential capital investments for annual capital budgeting. With limited resources, they must make strategic choices.

This requires ranking many capital projects by strategic alignment, financial evaluation, and risk. Without this, CapEx allocation becomes fragmented.

In this blog, we explore how to prioritise capital projects and consider tools and frameworks to help ensure the right CapEx projects are selected.

Capital project prioritisation criteria

When prioritising capital projects, we recommend evaluating each CapEx project based on the following criteria.

Strategic alignment

Capital allocation should support long-term strategic priorities like market expansion, sustainability, and compliance. For example:

• A hotel operator aiming to increase RevPAR may prioritise refurbishing guest rooms.
• An organisation with a sustainability strategy may favour energy-efficient upgrades or broader ESG initiatives.

Projects that do not contribute to long-term objectives should not receive funding.

Commercial evaluation

Every CapEx proposal should undergo a robust financial analysis using metrics such as:

• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Payback Period (PBP)

These models help assess feasibility, expected returns, and opportunity costs. Senior leaders will typically compare competing projects and evaluate ROI, cash flow profiles, and shareholder value.

Risk profile

Every capital investment is high stakes and carries risk.

A risk assessment will identify potential risks, impact, and likelihood, resulting in an overall risk rating (without mitigation). The risk analysis will also outline mitigation plans/actions and provide a revised rating, with the most acceptable risk profiles allocated funding.

Urgency

Urgency influences prioritisation, particularly where:

• The project is revenue-enhancing or profit-generating (growth CapEx).
• Statutory, compliance, or health and safety requirements apply.
• Assets near end-of-life require repair/replacement.
• Emergency conditions occur (e.g., a leaking hotel roof).
• Fast-moving or emerging business opportunities arise.

Organisations should maintain contingency budgets to respond to unplanned but high-priority needs.

Resource availability

Capital projects may be delayed if resources are limited. Companies must consider:

• Internal expertise
• Contractor capacity
• Supply chain availability
• Time and operational disruption

Prioritisation helps ensure resources are allocated to projects that align with strategic initiatives and offer acceptable financial returns.

Project prioritisation methods

Common methods for prioritising capital expenditure projects include:

Budgeting techniques

Financial metrics should be provided for all capital investments. There are several profitability indicators used to analyse the merits of capital expenditure projects. These include:

Payback period

The payback period is the time taken (in years and months) to repay the initial capital expenditure. The calculation is initial cost / annual cash flow or savings.

In terms of prioritisation, projects with a faster payback period will be prioritised as the investment is considered more feasible and less risky.

All projects should be ranked by payback period, with the company only pursuing projects with the shortest payback until the CapEx budget is spent. A company may decide to reject any project with a payback period over a certain threshold (>3 years).

While the payback period is a useful financial metric, it does have some significant drawbacks. These include oversimplification and the failure to consider risk or continued cash flow after the investment has been repaid.

As a result, it is advisable to combine a payback calculation with other metrics like NPV or internal rate of return.

Net Present Value

NPV is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

Also known as net present worth (NPW), the formula is used to calculate the value of an investment by discounting future cash flows to the present rate to understand if the project is feasible.

A positive NPV indicates that the project is highly desirable with a likely good ROI, while a negative NPV suggests the CapEx project will be unprofitable and should be cancelled.

IRR

The internal rate of return is a method of calculating the annual rate of return of a planned capital expenditure project. IRR is a discount rate that makes the NPV of all cash flows equal to zero in a discounted cash flow analysis.

IRR is similar to NPV with a higher rate of return making an investment more attractive. Most companies will set a minimum rate of return for a project, for example, an IRR of 33% is required for projects categorised as growth CapEx.

IRR measures the time value of money but does not consider risk or external influences like inflation.

Hurdle rates

A hurdle rate is the minimum acceptable rate of return for an investment to be considered economically viable.

It is simple to use, but you risk missing out on strategically important investments if used in isolation.

To reduce bias, financial metrics should be used with EVA, RONA, or other value-based models where appropriate.

Weighted scoring models

Weighted scoring models evaluate projects against criteria such as:

• Strategic fit
• ROI
• Cost
• Risk
• Urgency
• Resource availability

This criterion is weighted and assigned a score. This will ensure important factors (like strategic fit and ROI) will have the most influence on the final decision.

Weighted scoring example

In the example below, a hotel owner/operator is deciding between three competing projects.

The building of new gym/spa facilities is the most favourable project because it fits with strategic objectives (increase revenue per available room (RevPAR)) and has a positive impact on ROI as it diversifies hotel operations, enabling them to market gym/spa facilities to their local community as well as guests.

To calculate, assign a score against each criterion (e.g., 9) and multiply that figure by the weighted score (9 x 0.30 = 2.7), then sum each criterion for a total score.

Portfolio matrix

These frameworks map projects on axes/quadrants.

BCG Growth Share Matrix

The BCG growth share matrix is a portfolio management framework that helps companies decide how to prioritise their different businesses.

Each of the four quadrants represents a combination of market share and growth (high growth, high share (stars) and low share, and low growth (pet)).

GE McKinsey Matrix

The GE McKinsey Matrix is a systematic approach for multi-business corporations to prioritise investments across their business units.

These matrices support organisations to allocate their capital budget across their portfolio of companies and/or business units. Other tools, such as MoSCoW, are available.

Best practices for prioritising capital projects

Establish clear governance

Without formal governance, capital decisions may be influenced by internal politics or personal bias.

Consequently, we advise establishing procedures on project prioritisation (e.g., criteria, frameworks, weighted scores, etc.) and applying them. This will provide transparency and ensure projects are consistently evaluated.

Implement stage gates

Stage gates create a structured method for evaluating CapEx projects.

Each phase ends with a “decision gate” that determines whether the project moves forward, is revised, or is stopped entirely.

Stage gates reduce risk, support strong governance, and deliver better outcomes.

The incremental nature of stage gates means businesses continually monitor and review projects and avoid allocating capital to unviable or outdated proposals.

Use financial metrics

Every project must be stress tested and ranked in terms of best case, base case (most likely), and worst case.

Standardise CapEx templates

Standardised business cases for capital expenditures ensure projects are consistently evaluated. The template should include:

• Executive summary
• Financial information (NPV, payback, etc.)
• Costs/expenditure phasing
• Supporting documentation

Many organisations use outline business cases for early screening, followed by detailed business cases for formal approval.

Build a balanced portfolio

Create a balanced CapEx portfolio by diversifying across:

• Short- and long-term projects
• Project category (e.g., growth, maintenance, regulatory, and technology)
• Strategic objective (e.g., market share, sustainability, and compliance)
• Departments, sites, and regions
• Risk appetite (e.g., risk averse, risk seeking, and risk neutral)

A diversified capital portfolio will balance high-risk/high-reward investments with more stable projects. This will reduce exposure to significant risks and prevent over-commitment in one area.

Use scenario planning

Use scenario planning to test how unexpected events (e.g., exchange rate fluctuations, inflation, and supply chain disruptions) will impact project feasibility. This stress test ranks each project in terms of best case, base case (most likely), and worst case.

Similarly, sensitivity analysis compares how changes in key variables (e.g., investment costs, discounts, and depreciation) affect CapEx outcomes like NPV, payback period, or IRR.

Conduct a post-investment review (PIR)

We recommend conducting a post-investment review.

PIRs assess ROI, timelines, benefits realisation, and expenses, utilising lessons learned from both successes and failures to enhance future projects and prioritisation.

Automate processes

Traditionally, finance teams have relied on Excel spreadsheets to manage capital expenditures.

However, CapEx software like eCapEx is available to support the capital expenditure process from project prioritisation and budget setting to request submission/approval and post-investment review.

Conclusion

Prioritising capital projects is a strategic imperative and can help companies make more informed investment decisions.

By combining financial analysis, stage-gate processes, weighted scoring models, strong governance, and the right technology, businesses can prioritise high-priority projects and build a balanced CapEx portfolio that maximises value and minimises risk.

Please call 03300 100 000 or contact us to book your eCapEx demonstration or discuss your requirements.