Financial justification
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Payback, Discounted Cash Flow, Net Present Value, and Internal Rate of Return. Financial Justification. Contents. Purpose Responsibilities Sources of data Company rules Payback Discounted cash flow and NPV Internal Rate of Return Sensitivity Analysis. Purpose.

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Presentation Transcript
Financial justification l.jpg

Payback, Discounted Cash Flow, Net Present Value, and Internal Rate of Return

Financial Justification


Contents l.jpg
Contents Internal Rate of Return

Purpose

Responsibilities

Sources of data

Company rules

Payback

Discounted cash flow and NPV

Internal Rate of Return

Sensitivity Analysis


Purpose l.jpg
Purpose Internal Rate of Return

Identify and document financial effects

Gain financial commitment

Set development and operational targets

Costs versus benefits, in business terms

Gain approval for the development budget

Set parameters for the financial performance of the project and the on-going operation


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Identify, estimate and control costs Internal Rate of Return

Identify, estimate and deliver benefits

Project manager may have to drive this process

Responsibilities

Project Manager

Sponsor/Customer/User


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From Project Manager’s plans Internal Rate of Return

From the list of product features, developed into measurable benefits by the sponsor/customer

Tangible

Intangible

Indeterminate

Sources of Data

Costs

Benefits


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Payback Internal Rate of Return

NPV

IRR

Usually 5

Capital expenditure

The accountant’s black art

Company Rules

Types of analysis and presentation

Numbers of years to analyse

Taxation and Investment rules

Discount rates to apply


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Basic Data Internal Rate of Return

Year 0 represents the development period

Probably need more detail than this

Need detailed breakdown


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Payback period Internal Rate of Return

Payback at end of year 3


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Levels of sophistication Internal Rate of Return

Simple payback sufficient for many organisations

Takes no account of the ‘time value’ of money

Difficult to compare different projects competing for limited development funds

‘Compounding’ means adding the interest to the principal sum, year on year

‘Discounting’ means taking out the interest, backwards in time


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DCF - Discounted Cash Flow Internal Rate of Return

10%

NPV


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Internal Rate of Return Internal Rate of Return


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Sensitivity analysis Internal Rate of Return

cost

benefit

BUT

What if….

time

payback


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