DAY 8

PROJECT
SELECTION

Presented By
Ibrahim Mashaal . PMP

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 Payback period

 Project A requires investment of 500.00 $ The project is expected to

generate 25000$ per quarter for the first year and 100.000 $ per
quarter after that. What is the payback period?
 When I get 500.000& Back ??
 First Year = 25k + 25k + 25k + 25k = 100K still need 400K
 Second Year = 100k + 100k + 100k + 100k = 400k (now we get back
500K$)
 Then Payback Period is 2 Years 24 Month
 Project Smart Objectives

 S - specific, significant, stretching

 M - measurable, meaningful, motivational

 A - agreed upon, attainable, achievable, acceptable, action-oriented

 R - realistic, relevant, reasonable, rewarding, results-oriented

 T - time-based, timely, tangible, trackable

 Benefit Cost Ratio (BCR)

Which of the following projects do you select?

 A) Project Gold with a BCR of 0.9
 B) Project Silver with a CBR of 0.9 and cost of $100,000
 C) Project Diamond with a cost of $100,000 and benefits of $110,000
 D) Project Platinum with a 5CR of 1.2
a) 0.9
b) 5CR = 1/0.9 = 1.11
c) 11/10 = 1.1
d) 1.2 Answer is the bigger BCR is 1.2 D
 Sunk cost & Opportunity cost

 Sunk cost : is a cost that has already been incurred and cannot be recovered. Not
considered in any selections.
 Opportunity cost : is the benefits you could have received by taking an alternative action.
 Law of diminishing returns – the more you put in, the less you get in return
 Working capital – assets minus liabilities; what the company has to invest in projects
 Depreciation – know these for the exam
 Straight-line depreciation
 Accelerated depreciation
 Double declining balance
 Sum of the Years Digits
 Q
Q: A company spends $50,000 on a marketing study to see if
its new auburn widget will succeed in the marketplace. The study
concludes that the widget will not be profitable. At this point, the
$50,000 is

Sunk Cost
 Q
Q: As a consultant, you get $75 an hour. Instead of working one
might, you go to a concert that costs $25 and lasts two hours. The cost of
the concert is $150 for two hours of work considered as .

Opportunity Cost
 Present Value

Now Year 2 4000$

• Discount Rate = 10%

• PV=4000/(1+1O/100)^2
• PV = 4000/ (1.1) ^2
• PV =4000/1.21
• PV = 3305
It mean 3305 USD earned today is equals to 4000 USD earned after two year
 Present Value

Now Year 2 4000$

A B

Option A : Returns: 4000 USD after 2 years.

Option B: Returns: 3500 USD after 1 years
Discount rate 10% Per year

Option A : Option B :
PV =4000/(1.1) ^2 PV = 3500/(1.1)
= 3305 USD = 3181 USD
 Net Present Value

Now Year 2 FV2

A B

• NPV is a measure of how much money a project can be

expected to return (in today’s present value).
• It’s a Sum of Inflow and outflow in present value term (mean
discounted based on duration)
 Net Present Value

Now Year 2 FV2

A B

• NPV is a measure of how much money a project can be expected to return (in today’s
present value).
• It’s a Sum of Inflow and outflow in present value term (mean discounted based on duration)
 
NPV = Sum (PV) = Sum (FV /(1 + i) ^ n)
i = Discount rate
n = Period
FV = Future Cash Inflow (-f) / Outflow (-)
 Net Present Value
Outflow 1000$ Inflow 4000$
Now Year 2
A B

• Discount Rate = 10%

• NPV = -1000- 1000/((1+1O/100)^1) + 4000/((1+1O/100)^2)
• = -1000 - 909 + 3306
• = 1397 (This Project returns 1397 USD in present value term)
 Q
Q: Which Project to Select?
Project A has a duration of 4 years and an NPV of $40,000,
Project B has a duration of 3 years and an NPV of $45,000,
Project C has a duration of 6 years and an NPV of $62,000

Answer C
 Internal Rate of Return (IRR)
 The rule is same like NPV, the difference is, now we need to
 compute the rate (i) which equalizes the cash inflow and outflow
 0 = Sum (FV / (1 + i)^ n)
 = IRR this is what we calculate n = period
 Calculate sum All Inflows and outflows and calculate at what particular
rate they equal zero
 IRR is a measure of how quickly the money invested in a project will
increase in value. It’s a rate of return which calculate based on the
inflow and outflow of the project.
Summary
PV ●
Big CB ● Sm
NP ●
ger R all
V is Pa ● er
IR ●
be yb is
R ack
tte bet
BC ● per
r iod ter
R
THANK YOU
Presented By
Hope this course Help you to the way you manage successful projects Ibrahim Mashaal . PMP

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