Capital Allocation: How to decide which projects deserve investment

🛠 THE CFO EFFECT PLAYBOOK (Part III)

First Lens: The ICE Framework

When faced with a laundry list of opportunities, I like to apply a simple, practical filter: ICE.

ICE stands for: Impact, Confidence, and Ease.

• Impact
  What’s the potential upside?

  How does this project move us toward the company’s overarching goal?
  

  Examples:
  • Will it boost revenue or expand margin?
  • Will it create a competitive advantage?
  • Will it unlock scalability for the long term?

• Confidence
  How sure are we that we can actually deliver on this?
  • Do we have the skills internally?
  • Do we have the leadership to push it through?
  • Have we executed similar projects before?

• Ease
  How difficult and time-consuming will execution be?
  • Is this a 3-month initiative or a 3-year slog?
  • Does it require massive change management?
  • Will it stretch the team too thin?

ICE forces discipline.
It stops you from falling in love with flashy ideas that sound exciting but are impossible to execute; or projects that would swamp your team for years without moving the needle.

Why this matters: Classic finance metrics like NPV or IRR don’t account for execution drag.

They assume projects launch on schedule and deliver cash flows as modeled.

But in reality, execution speed and complexity can make or break a project’s return.

Example: If your model assumes cash inflows start in year 2 but execution delays push that to year 4, your IRR collapses.

ICE surfaces those risks upfront.

The Second Lens: The Financial Metrics

Now let’s go through the main capital allocation tools looking at their strengths, weaknesses, and blind spots.

1. ROI (Return on Investment)

• Definition: (Gain – Cost) ÷ Cost

• Strengths:

  • Very simple and intuitive.

  • Easy to communicate to non-financial stakeholders.

• Weaknesses:

  • Ignores time.

  • A project with 100% ROI over 10 years looks “better” than one with 50% ROI in 1 year, even though the latter compounds wealth faster.

Use case: Quick communication. Not a decision-making tool on its own.

2. NPV (Net Present Value)

• Definition: Discounted value of future cash flows, using Weighted Average Cost of Capital (WACC) as the hurdle.

• Strengths:

  • Theoretically the most rigorous.

  • Accounts for time value of money.

  • Direct measure of shareholder value creation.

• Weaknesses:

  • Extremely assumption-sensitive (WACC, growth, margins, terminal value).

  • Tiny changes in assumptions can swing outcomes massively.

  • Complex to explain to operators.

Use case: The gold standard for CFOs/PE. But must be paired with sensitivity analysis.

3. IRR (Internal Rate of Return)

• Definition: The discount rate that makes NPV = 0.

• Strengths:

  • Easy to benchmark: if IRR > WACC, project creates value.

  • Allows comparison across projects.

• Weaknesses:

  • Assumes reinvestment of interim cash flows at the same IRR (rarely realistic).

  • Misleading when comparing projects of different lengths.

  • Breaks down with non-standard cashflows.

Use case: Compare projects quickly, but don’t rely blindly. Always cross-check with NPV.

4. Payback Period

• Definition: Time required to recover the initial investment.

• Strengths:

  • Very useful in liquidity-constrained businesses.

  • Highlights early-return projects that recycle capital faster.

• Weaknesses:

  • Ignores cash flows after breakeven.

  • Can bias decisions toward short-term thinking.

Use case: A liquidity lens, especially relevant in startups or cyclical industries.

Devil’s Advocate: Why None of These Alone Is Enough

1. ROI is too simplistic. Looks good on paper but ignores timing.

2. NPV is fragile. Change a few assumptions and your “great project” vanishes.

3. IRR overpromises. Assumes you can reinvest interim cash at the same rate. Rarely true.

4. Payback is short-sighted. Rewards quick flips but misses long-term compounders.

5. WACC is too blunt. Treats every project the same, ignoring strategic nuance.

And here’s the kicker: execution risk.
None of these frameworks account for the reality that projects slip, talent leaves, and complexity kills momentum.

That’s where ICE fills the gap.

The Third Lens: Combining Frameworks into a CFO Playbook

Here’s how I approach it in practice:

1. Start with ICE.

   • Filter projects by Impact, Confidence, Ease.

   • Eliminate the “sexy but impossible” ones early.

2. Run the Numbers.

   • Use NPV as your anchor.

   • Check IRR vs WACC for quick comparisons.

   • Look at Payback if liquidity is tight.

   • Use ROI for stakeholder communication.

3. Layer Strategic Judgment.

   • Does this project accelerate the company’s strategy?

   • What’s the downside case?

   • Does it unlock future options or lock us in?

4. Stress-Test Execution.

   • Add delays into your model.

   • Push cash inflows back by 6–12 months and see what happens.

   • If IRR collapses under realistic delays, reconsider.

 A Real Example

Two projects, side by side:

• Project A:

  • 25% IRR

  • Requires $10M upfront

  • 3-year buildout before returns start

• Project B:

  • 18% IRR

  • Requires $3M upfront

  • Launches in 6 months

  • Payback in 18 months

On IRR alone, Project A wins.
But when we apply ICE, execution risk, and payback analysis → Project B clearly wins.

Why? Because the earlier returns from Project B fund additional initiatives (C and D) in year 2.

Sequence compounds faster than a single moonshot.

The Practical Takeaway

Capital allocation isn’t about finding a “perfect” metric.

It’s about building a layered decision system:

• ICE → Practical filter (what’s impactful, realistic, executable).

• NPV/IRR/ROI/Payback → Financial rigor (does it create value above WACC?).

• Strategic Judgment → CFO lens (fit, risk, optionality, timing, resilience).

Use them together and you’ll see the real picture; not just the spreadsheet version.

Next Week’s Episode:

🔜 Capital allocation in practice: OPEX, CAPEX, and M&A

The best CFOs allocate capital like investors.

This week, we covered the frameworks behind smart investment decisions.

But frameworks alone don’t tell you how to apply them in the real world.

Because in practice, not all capital decisions are created equal.
Some are about speed. Others about scale. Others about integration.

Next Sunday, I’ll break down how elite CFOs adapt their approach across three categories:

🏃 OPEX Decisions: short-term bets that demand fast feedback loops.
🏗 CAPEX Projects: long-term investments where execution realism is everything.
🤝 M&A Deals: transformative moves where integration risk determines success or failure.

You’ll learn:
✅ How to tailor ROI, NPV, and IRR analysis to each type of investment.
✅ How to apply the ICE framework to test execution feasibility, not just financial return.
✅ Why capital allocation discipline is the ultimate differentiator between finance managers and true value creators.

Because the best finance leaders shape how capital creates value.

If you’re ready to master capital allocation in practice, from OPEX to CAPEX to M&A,
you won’t want to miss this episode.

Disclaimer:
This content is for informational and educational purposes only and should not be construed as financial, legal, or professional advice. Always consult with a qualified advisor before making any business or financial decisions. The author and publisher disclaim any liability for actions taken based on this content.

Talk soon,