Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
S ELECTION C RITRIA
September 2015
Hisham Haridy,
PMP, PMI-RMP
September 2015
September 2015
PV =
Where:
FV
(1+i)n
PV:
Present Value
FV:
Future Value
i :
Interest rate
n:
Example
What is the present value of $300,000 received three years from now if we expect the interest
rate to be 10 percent?
PV =
PROJECT COST MANAGEMENT
300000
(1+0.1)3
= $225,394
September 2015
The sum of the present value of all income and expenditures of a project. (> 0 is ok).
It is the present value of the total benefits (income or revenue) minus the costs over many
time periods.
FV
(1+k+i)n
Initial investment
Example
You have two projects to choose from. Project A will take three years to complete and has an
NPV of $45,000. Project B will take six years to complete and has an NPV of $85,000. Which
one would you prefer?
Project B
Key selection: Maximum NPV
September 2015
Time
Income /
Period
Revenue
200
200
50
45
100
91
100
83
300
225
Total
Costs
353
NPV=
353 - 291
291
= $ 62
September 2015
Where:
i:
Example
FV
(1+k+i)n
Initial investment
Rate of return
You have two projects to choose from; Project A with an IRR of 21 percent will be
completed in 4 years or Project B with an IRR of 15 percent will be completed in one year.
Which one would you prefer?
Project A
Although the project B has a smaller duration than project A does not
matter because time is already taken into account in IRR calculations
Key selection: Greatest IRR
September 2015
Payback Period=
Initial Investment
(Annual cash inflows)
September 2015
A project costs $100,000 to implement and has annual net cash inflows of $25,000.
Payback Period=
100,000
25,000
4 years
Example
Project A has an investment of $ 500,000 and payback period of 3 years. Project B has an
investment of $ 300,000 and payback period of 5 years. Using the payback period criteria,
which project will you select?
Project A
September 2015
Cash flow
-1000
500
400
300
100
-1000
-500
-100
200
300
Years
Cash flow
-1000
100
300
400
600
-1000
-900
-600
-200
400
September 2015
Project A has an investment of $ 500,000 and BCR of 2.5 Project B has an investment of $
300,000 and BCR of 1.5 Using the Benefit Cost Ratio criteria, which project will you select?
Project A
Although the project B has a smaller investment than project A will not impact the selection
September 2015
Project A
Project B
Selection
NPV
$ 95,000
$ 75,000
IRR
13 %
17 %
16 months
21 months
2.79
1.3
Payback Period
Benefit : Cost ratio
September 2015
The cost that has already been incurred therefore cannot be avoided going forward.
Example
Project A had initial budget of $ 1,000 out of which $ 800 has already been spent. To
complete project A, we will need additional $ 500. Another Project B will require $ 1200
for completion. Which project do you want to select?
Project A
$ 800 spent in project A i.e it is sunk cost hence should be ignored. So, at this point of
time,
September 2015
Example
You have two projects to choose from: Project A with an NPV of $45,000 or Project B with
an NPV of $85,000. What is the opportunity cost of selecting project B?
Project $45,000
September 2015
This concept is concerned with whether the project returns to the company more value
than it costs.
The amount of added value the project produces for the company's shareholders above
the cost of financing the project
The amount of money the company has available to invest, including investment in
projects.
September 2015
Large assets (e.g., equipment) purchased by a company lose value over time.
There are two forms of depreciation:
1. Straight Line Depreciation
2. Accelerated Depreciation
Accelerated Depreciation
each year.
September 2015