Forecasting the Financial Stability of the Project

by Sambittin Execution, Ideas & Conceptson Posted on


The Time value of money for projects is calculated not only in terms of money, but also in terms of:
  •         Return on Investment (RoI)
  •         Customer satisfaction
  •         Employee satisfaction
  •         Innovation Rate
  •         Customer Usage
  •         Customer retention
  •         Repeat Customer
  •         Revenue per employee

The forecasting value helps in determining whether the project is beneficial to proceed or to stop the project (fail fast).
Product owners are primarily responsible for maximizing the project value.
The primary reason for undertaking projects are:
  •         Increasing the revenue
  •         Reducing operating cost by automating work flows
  •         Regulatory compliances
  •         Performance improvement.

Whatever be the reason for running projects, forecasting the financial stability of the project is done using following methods:
  •         Return on Investment (ROI)
  •         Net Present Value (NPV)
  •         Internal Rate of Return (IRR)
  •         Payback period

Return on Investment (ROI): ROI is a performance measure used to evaluate the efficiency of an investment or to compare efficiency of a number of different investments.
ROI – Projected benefits – Costs / Costs
Higher the ROI, better for the project. So out of multiple projects, the order of selecting projects would depend on how high the ROI is.
Net Present Value (NPV): NPV is a method of calculating expected net monetory gain or loss from a project by discounting all expected future cash inflows and outflows to the present value.
In simple terms – It is a measure of the amount of money the project is expected to earn in today’s value.
So, if NPV is positive, accept the project. Out of multiple projects, it is prudent to select a project with higher NPV.

Internal Rate of Return (IRR): IRR shows the interest rate at which NPV becomes zero. IRR is calculated by a company as a minimum threshold to break even.
A project with higher IRR is always preferred. SO, from multiple projects, one should prefer the one with higher IRR.

Payback Period: It is the amount of time taken to regain the net amount invested in a project, i.e., to break even. Companies always prefer shorter payback period.
So as a summary, select a project that has higher NPV, ROI, IRR and a shorter Payback period.

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