Business case techniques checklist
This checklist covers techniques that you can use for calculations associated with the project business case. Although some may seem complicated at first sight, don’t worry because you’ll find there really quite straightforward once you’ve carried out some of the calculations.
Cost-benefit analysis (CBA)
This is usually set down on a spreadsheet showing the costs of the project and then on-going costs set against savings, year on year for a set number of years, often five.
The CBA shows when the project will payback; the point at which the cumulative savings become greater than the cumulative costs.
Some projects will never payback but you have to run them anyway, such as for the equal compliance. In that case the CBA will show the final costs after the offsetting of benefits, if any.
It is a term associated with CBA but refers just to the point where the costs will be offset by the financial benefits.
It does not take account of the future value of money, has covered by the next point on the checklist.
Discounted cash flow (DCF)
Also known as the net present value from the spreadsheet function NPV. DCF shows money in future years as Leicester valuable than that in earlier years.
So a project costing five million dollars, and pay him back nothing before year five when it will make a one off saving of five million won’t actually pay for itself.
If you find the DCF concept awkward to understand at first, consider this simple example.
A mansion that I were going to give you $10,000. I could transfer the money directly into your account today, or I could transfer the end $1000 into your account in five years’ time.
Which would you prefer?
Well, you would say today please.
You know that in five years’ time the money won’t have the same spending power. Even if you put the money into a savings account you would end up with more intent $1000 in five years’ time because you get some interest.
The discounted cash flow techniques just reflects the reality with the discount factor increasing year by year so that the further you go into the future, the less value of money hands.
Internal rate of return (IRR)
Related to DCF, you can use this technique to look at different possible projects to see which one offers the best return.
You set a date, such as five years, then increase the discount factor until the project exactly pays for itself. The higher the discount factor needed to get to the zero, the better the return of the project.
However, see the remember point below.
Return on investment (ROI)
A simple formula to compare the financial return from the project (financial benefits) against what it costs to run the project.
So and ROI of 2.0 would mean the return would be double the investment. You should also specify the period of time. An ROI of 2.0 would be more impressive after 10 months then after 10 years.
Remember. The techniques used for making calculations on benefits and all investments are financially based. Remember that there are other reasons to run a project, although a benefits justification is the most common.
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