Explain The Principal Purpose Of A Project Business Case

Paul Naybour

a) Business
case provides justification for undertaking a project or programme, evaluating the
benefit, cost and risk of alternative option, and provides a rational for the preferred
b) The
Project Sponsor and the Project Manager are typically the authors with input from
other stakeholders. The Project Sponsor owns the Business Case throughout the
Project lifecycle once approved by the Sponsoring group.
c) Three investment
appraisal techniques are:-
– Payback
– Net Present
– Internal
Rate of Return.
The Payback
method is where the income is compared with the Project cost to help understand
when the Investment will be recovered, and this is expressed as a number of
years. E.g. If the total cost is £24000, and the projected income is £6000 per
year, the Payback is year 4.  It is quick
and east to calculate but does not take into account the future value of money
or look beyond the payback date. 
The Net
Present Value (NPV) takes into account how the value of money changes over
time.  To adjust for the cost of capital
the value of further returns is reduced by a discount factor.  These are set by the Organisation according
to its own policies.  The Net Present
Value is determined by subtracting the total project Investment cost from the
totals of the income returns that have been discounted each year.  A weakness of NPV is that there will be a different
answer depending on different discount rates used.
The Internal
rate of Return (IRR) recalculates the NPV using different discount rates, to
determine the optimal rate.  It can be
shown by plotting the NPV against successive discount rates to determine the maximum
rate that the project can bear without making a loss.  Once the IRR is calculated for a Project, it
can then be compared with other projects to allow the organisation to make
decisions on which projects can potentially go ahead.

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