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Financial Justification

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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Financial Justification

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  1. Payback, Discounted Cash Flow, Net Present Value, and Internal Rate of Return Financial Justification

  2. Contents Purpose Responsibilities Sources of data Company rules Payback Discounted cash flow and NPV Internal Rate of Return Sensitivity Analysis

  3. Purpose 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

  4. Identify, estimate and control costs Identify, estimate and deliver benefits Project manager may have to drive this process Responsibilities Project Manager Sponsor/Customer/User

  5. From Project Manager’s plans From the list of product features, developed into measurable benefits by the sponsor/customer Tangible Intangible Indeterminate Sources of Data Costs Benefits

  6. Payback 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

  7. Basic Data Year 0 represents the development period Probably need more detail than this Need detailed breakdown

  8. Payback period Payback at end of year 3

  9. Levels of sophistication 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

  10. DCF - Discounted Cash Flow 10% NPV

  11. Internal Rate of Return

  12. Sensitivity analysis cost benefit € BUT What if…. time payback

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