Guessing is not a strategy: How to build decision velocity with AI and real-time data
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Posted on: July 25, 2011 04:47 PM |
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What is NPV?
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A good, basic definition of net present value, not enough info to use the concept - NPV is a simple-yet-complex idea. For example: you're trying to decide whether to develop your own CRM software, or buy off-the-shelf. Your company's required rate of return is 14% and you use a 3 year window to look at cash flows. Working with marketing, IS, finance, you get all the cash flow info, and determine that NPV for the DIY CRM product is $800, and for the off-the-shelf CRM product is $10. Hm, looks like the DIY project wins. But wait! Some other questions need asking first. What's the initial investment, and when does the money have to be paid? How much uncertainy is there in the cash flows (maybe we should run some what-ifs)? What other (non-quantitative) criteria should be taken into account (availability of resources during the project time frame, success of past DIY projects, why do we need custom software)? Both projects technically have an acceptable NPV. Any NPV value of zero or greater means your project meets the required rate of return.
Tracie, thanks for this example. NPV is just one metric, and it does need a lot more to support the decision making process, as you point out.
 | Anonymous |
You got the definition now learn how to calculate net present value - usually PM's do not do NPV's that is decided whether project is a yes \ no at business financial stages
http://www.ehow.com/how_2187130_calculate-net-present-value-npv.html
http://www.ehow.com/how_2187130_calculate-net-present-value-npv.html
I think project managers should be involved at the yes/no stage because many of the decisions involved hinge on the practicality of doing the work. Certainly programme and portfolio level employees should be part of this.
I agree, Elizabeth - the project manager or program manager will often have information that should be taken into account in developing NPV.
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