PRINCE2 Business Case Investment appraisal techniques

The Investment appraisal section of the Management Product: Business case can host many techniques

Project finance can be delegated to finance project experts (Business Assurance) but the PRINCE2 manual is mentioning some key techniques a project manager could easily use

Most of them a financially related but because the benefits of a project are not always financial, they cannot always be applied

Here is a short summary about how assessing a project investment with PRINCE2

1. Through-life costs

Analysing the overall cost of the project from early steps to the maintenance cost

Also called Whole-life cost analysis, the initial costs of a project could be affordable and the maintenance expensive

It is interesting to compare several project or scenario for a project in the Starting Up with this technique

How to?

Sum all costs, of the project, maintenance, operations, disposal, contract, decommissioning….

2. Net benefits

Analysing the total value of the benefits less all costs of implementation over a specific period

Also called Cost-benefits analysis

Example: If you deploy new software, you can assess the benefit value over a 4 years period before another major release that requires another project

How to?

Sum all benefits value less implementation and maintenance cost over a defined period

3. Return on investment (ROI)

Same as Net benefits if all benefits were financial but the ROI provide a metric(ratio) to assess non-financial benefits (still measurable) on a specific area

How to?

ROI=(Gain from project – Cost of project)/Cost of project

Or

ROI=(Gain from project – production costs)/production costs

Or just

ROI=Gain from project /Cost of project

4. Payback period

The payback period is the length of time required to recover the cost of an investment

How to?

Payback period= Cost of project/Annual cash Inflows*

*Annual cash Inflows= the yearly financial income

5. Discounted cash flow (DCS)

Because the value of money changes with time (ex: inflation rate) and if the benefits of your project are over several years, months or the value is important enough, it is possible to consider the money value based on the current value of the money

How to?

(CF= Cash flow), r= the interest rate or discount rate, n=time in years before the future cash flow

Discount rate tables are available online  here is one for example here: http://www.cimaglobal.com/Documents/Student%20docs/2010%20syllabus%20docs/P1/P1-performance-operations-tables-2010-syllabus.pdf?utm_source=referrer&utm_medium=banner&utm_campaign=p1samples

6. Net present value

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows

How to?

C_t = net cash inflow during the period t

C_o = total initial investment costs

r =discount rate, and

t = number of time periods

With an inflation rate of 6% (r), the present value of money over 12 years is divided by 2

Example 1000£ forecasted benefits in year 12 worth 500£ in today money value

7. Sensitivity analysis

If you are facing uncertain forecast regarding the objectives of your project (cost, timescale, quality…) and also the output (operation, maintenance costs…)

Analysing those factors enables you to identify how robust is the Business Case and change the investment decision

The project could be worthwhile if taken before a few months and not after

Source:

Managing Successful Projects with PRINCE2®