Connecting the Dots: Using the Net Present Value Metric

  PM Network  

There’s just no question about it: Projects are connected to your organization’s bottom line. They are tied to considerations such as earnings, profit and loss, and cash generation. This is true for any company in the business of making money. It’s also true for not-for-profit entities that seek to demonstrate fiscal responsibility by executing projects related to costeffectiveness or cost savings.

Sadly, this fact seems to go unnoticed (or unappreciated) by some organizations. It’s easy to tell who they are—the ones that actively argue against the use of financial criteria as a method to evaluate, justify and ultimately approve projects.

Let’s be clear: I’m well aware of the challenges associated with converting certain kinds of benefits into dollars, euro, yen, etc. I’ll address the process for converting so-called “soft” or intangible benefits into monetary value in a future column. But this month I want to discuss why companies should try to make that conversion.

It all begins with market value added (MVA), a companylevel wealth metric that shows the difference between the market value of a company and the capital contributed by investors. A positive MVA means the value of management’s long-term actions and investments are greater than the value of the capital that has been contributed to the …

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