benefit cost ratio, ROI, pay back period

Lalit Kumar Jain Project Management Consultant & Trainer| Visiting Professor, Poornima University, Jaipur, Rajasthan(India) Dubai, Dubai, United Arab Emirates

Dear Friends,

Consider the following imaginary situation. A person open a photocopy shop at an investment of 10000 USD. Within the 1st year, his REVENUE is 9000 USD with a PROFIT of 4000 USD after deducting all expenses. In the 2nd year, his REVENUE is 13000 USD and the PROFIT is 6000 USD after deducting all expenses. Let us consider the bank interest rate as 7%.

For selecting a project, we have the following methods:

Pay back period
Benefit Cost Ratio
Return on investment
Net Present Value
Internal Rate of Return

Q1: In which method we have to use REVENUE and in which method we have to use PROFIT?

Q2: In which methods, the time value of money is to be considered and in which the time value of money has to be ignored?

Thanks in advance.

Regards
Lalit

Posted: Mar 3, 2019 8:17 AM

Sort By:

Kiron Bondale Retired | Mentor| Retired Welland, Ontario, Canada

All of these utilize profit when considering the difference between cash inflows and outflows for a given year.

Pay back period and basic (not discounted) ROI wouldn't consider time value of money but the other metrics would.

...

1 reply by Alok Priyadarshi

Mar 03, 2019 12:49 PM

Alok Priyadarshi

...

Thanks Kiron for very clear and helpful advice.

Posted: Mar 3, 2019 9:54 AM

Lalit Kumar Jain Project Management Consultant & Trainer| Visiting Professor, Poornima University, Jaipur, Rajasthan(India) Dubai, Dubai, United Arab Emirates

Thanks Kiron for the clarification.

Posted: Mar 3, 2019 12:34 PM

Alok Priyadarshi Project Manager| Tata Consulting Engineers Limited Jamshedpur, Jharkhand, India

Mar 03, 2019 9:54 AM

Replying to Kiron Bondale

...

Thanks Kiron for very clear and helpful advice.

Posted: Mar 3, 2019 12:49 PM

Abolfazl Yousefi Darestani Manager, Quality and Continuous Improvement| Hörmann-TNR Industrial Doors Newmarket, Ontario, Canada

It has to do with your formulation of the problem. Their results would be the same. Time value of money can (and should) be considered for all of them either directly or indirectly.

Posted: Mar 4, 2019 8:12 AM

Lalit Kumar Jain Project Management Consultant & Trainer| Visiting Professor, Poornima University, Jaipur, Rajasthan(India) Dubai, Dubai, United Arab Emirates

Daer Abolfazi, Thanks for your reply.

Now we have 2 different opinions. u r telling that time value of money should be considered for all the methods, where as Kiron Bondale is saying that "Pay back period and basic (not discounted) ROI wouldn't consider time value of money".

Can any other person help to arrive at a consensus?

Posted: Mar 6, 2019 2:46 AM

Alice Hanson Alice Hanson| Dessau Alberta, Canada

Hi Janit
Why dont' you conduct cost benefit analysis and use NPV to understand if the situation is feasible or not. I found a good example related to it.
https://www.projectcubicle.com/cost-benefit-analysis-example/

Posted: Nov 18, 2019 10:27 AM

Please login or join to reply

benefit cost ratio, ROI, pay back period

Sponsors

Vendor Events

Guessing is not a strategy: How to build decision velocity with AI and real-time data

Newsletters