Business Case question – Feedback required (Found this difficult – so feedback appreciated)

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    Brian Holt
    Participant
    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.

    #14655

    Paul Naybour
    Moderator

    Ok, I just added or the NPV=0 to the above

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