Business Case Question – Feedback Required (Found Difficult)

Paul Naybour

A Explain the principle
purpose of a project business case (10 marks)
The principle purpose of the
business case is to justify the project. The business case is developed during
the concept phase. Through a funnelling arrangement in which costs, benefits
and risks are considered for various solution options the sponsor will narrow down
to these options to a single viable and costed solution which will be
recommended for approval. For Example a new IT system is needed and the options
could include buying an off the shelf package or building a bespoke system.
Although the bespoke system could offer all the functionality that the business
requires the costs timescales and risks associated could mean that the business
case recommends an off the shelf package which has lower costs, quicker to
develop and less risk despite not having all nice to have functionality that a
bespoke package would bring.
b. State which roles
have responsibility for (10 Marks)

Authorship – The business case is developed by project manager
if one exists during the concept phase or if not then by a business analyst
with input from the sponsor.
Ownership – The business case is owned by the sponsor
throughout the project from its inception at the concept stage through to
benefits realisation phase.

c. List and describe
3 investment appraisal techniques (30 marks)

  1. Payback 
  2. Net Present Value
  3. Internal Rate Return

Payback – The income is forecasted over a number of years.
The payback is the year in which the investment of the project break even
against the forecasted income. They are simple to understand but do not take
into account future value of money and do not consider the overall return on
investment. For example 2 projects may have the same payback (e.g. year 3 but
project B may yield a greater rate of return over its operational life)
Net Present Value – The income is forecasted over a number
of years. The income from that investment is discounted against a discount
factor usually provided by the accounts department. The advantages are that
they take into account future value of money and yields a single value for
comparision against other investments. The disadvantage is that this method is
heavily dependant on a single discount factor.
IRR – This method uses 2 discount factors which are applied
against the forecasted income. These are then plotted on a graph x axis % and Y
axis showing income. A line is then drawn between the 2 points. At the point
where the line splits the x axis or the NPV=0 income shows the Internal rate of return
as a percentage. This takes into account future value of money, is not
dependant on a single discount factor and provides a means by comparison
against other investments (e.g. putting money in the bank. It is however more
complex to calculate.

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