In the previous modules, we discussed the overview of project and project management as well as the

environment surrounding the projects. This module triggers the process of creating two project
management business documents: 1) project business case; and 2) project benefit management plan.
Both of which are parts of the pre-work before initiating the project. Preparing the project documents
means thinking about the value of the project to the business. Aside from that, we will also learn in this
module how to select between mutually exclusive projects when the need arises.

After successful completion of this module, you should be able to:

 Understand the business documentations in the pre-work stage of the project

 Determine the difference between project business case and benefit management plan
 Identify different project success measures
 Select projects in mutually exclusive situations

Project Business Case

This document makes the case for the would-be project from a business perspective by providing
necessary information that can be used to assess whether or not the expected project outcome is worth
the required investment. It includes the business need, project objectives, and success criterion. The exact
form and content may depend on the company, but the following standard components are usually there
in this document.

 Business Need. The creation process of the project business case document is trigged by
some business need identified by the organization. This document contains the summary
of business assessment, which states the business problem or opportunity that is warranting
action; what business value this action would add to the organization; what the scope is of
the effort; and which stakeholders would be affected by this effort.
 Project Objectives. This starts by identifying the origins of the business problem or
opportunity at hand and the strategic objective and goals of the organization. Then it
addresses what to do about the problem or opportunity.
 Success Criterion. This component describes the plan of how the benefits delivered by the
project will be measured throughout the project lifecycle.
Project Benefit Management Plan
The project benefit management plan document describes what, when, and how project benefits would
be delivered and how they would be measured. The purpose of undertaking any project is to provide
some type of benefit as a result of delivering the products of the project. The key elements in the
document answer some key questions such as:

1. What are the project’s target benefits and how well do they align with the organization’s
business strategy?
2. What is the benefit delivery timeframe; e.g., sort terms, ongoing, phase by phase, or long
term?
3. Who is the benefit owner to record, report, and monitor the benefits as they materialize?
4. What are the metrics to tag or mark the realization and measurement of each benefit?
5. What are the key assumptions and risks regarding the benefit realizations?

Project Success Measures

Before we can talk about measuring the project’s success, we need to define success. Although most
project practitioners and researchers agree that project success is defined and measured by the degree
of meeting the project objectives, different stakeholders can have different ideas about which factors to
count and with how much weight in measuring success: e.g., time, cost, quality, alignment of result with
organization’s business strategy, etc. The bottom line is that project success is defined and methods or
metrics to measure it are determined for every project uniquely. The following are some financial factors
that may be used to measure the success of a project:

Return on Investment (ROI). This measures the overall effectiveness of management in generating profits
or returns with the available resources. This is computed using the formula:

Return on Investment Formula

𝑵𝒆𝒕 𝑩𝒆𝒏𝒆𝒇𝒊𝒕 𝒇𝒓𝒐𝒎 𝒕𝒉𝒆 𝑷𝒓𝒐𝒋𝒆𝒄𝒕 (𝑩𝒆𝒏𝒆𝒇𝒊𝒕 − 𝑪𝒐𝒔𝒕)
𝑹𝑶𝑰 =
𝑷𝒓𝒐𝒋𝒆𝒄𝒕 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
(3.1)

For example, if you spend $400,000 on the project, and the benefit for the first year is $500,000, then
ROI equals ($500,000–$400,000)/$400,000, which equals 25 percent. The greater the ROI the better the
project is. The benefit and costs can also be represented as cash inflows or outputs, respectively.

Benefit-cost Ratio (BCR). This is the amount of money a project is going to make versus how much it will
cost to build it. Generally, if the benefit is higher than the cost, the project is a good investment. This is
computed using the formula:

Benefit-cost Ratio Formula

𝑷𝒓𝒐𝒋𝒆𝒄𝒕 𝑩𝒆𝒏𝒆𝒇𝒊𝒕
𝑩𝑪𝑹 =
𝑷𝒓𝒐𝒋𝒆𝒄𝒕 𝑪𝒐𝒔𝒕
(3.2)
For example, if the projected cost of producing a product is $20,000, and you expect to sell it for $60,000,
then the BCR is equal to $60,000/$20,000, which is equal to 3. For the benefit to exceed the cost, the BCR
must be greater than 1.The greater the value, the more attractive the project is. The benefit and costs can
also be represented as cash inflows or outputs, respectively.

Present Value and Net Present Value (NPV). To understand these two concepts, you must understand
the concept of time value of money. The time value of money refers to the observation that it is better to
receive money sooner than later. Money that you have in hand today can be invested to earn a positive
rate of return, producing more money tomorrow. For that reason, a peso today is worth more than a peso
in the future. In other words, the project is costing you today but will benefit you tomorrow. So, to make
an accurate calculation for the profit, the cost and benefits must be converted to the same point in
time−that means we need to determine the present value of the benefit that you will receive in the future.
The NPV of a project is computed as:

Net Present Value Formula

𝑵𝑷𝑽 = 𝑷𝒓𝒆𝒔𝒆𝒏𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒇𝒖𝒕𝒖𝒓𝒆 𝒄𝒂𝒔𝒉 𝒊𝒏𝒇𝒍𝒐𝒘𝒔 (𝒃𝒆𝒏𝒆𝒇𝒊𝒕𝒔)
− 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒗𝒂𝒍𝒖𝒆 𝒐𝒇 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒏𝒅 𝒇𝒖𝒕𝒖𝒓𝒆 𝒄𝒂𝒔𝒉 𝒐𝒖𝒕𝒇𝒍𝒐𝒘𝒔 (𝒄𝒐𝒔𝒕)
(3.3)

As an example, assume you invest $300,000 today to build a house, which will be completed and sold
after three years for $500,000. Also assume that real estate that is worth $400,000 today will be worth
$500,000 after three years. So the present value of the cash inflow on your house is $400,000, and hence
the NPV is the present value of the cash inflow minus the present value of the cash outflow, which equals
$400,000–$300,000, which equals $100,000. For a project to be worthwhile economically, the NPV must
be positive.

Payback Period. Payback period is defined as the duration of time required to recover the original amount
of investment. It is computed as:

Payback Period Formula

𝑷𝒓𝒐𝒋𝒆𝒄𝒕 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝑷𝒆𝒓𝒊𝒐𝒅 =
𝑵𝒆𝒕 𝑨𝒏𝒏𝒖𝒂𝒍 𝑪𝒂𝒔𝒉 𝑭𝒍𝒐𝒘 (𝑰𝒏𝒇𝒍𝒐𝒘 − 𝑶𝒖𝒕𝒇𝒍𝒐𝒘)
(3.4)

For example, a project with a required investment of P750,000 and a net annual cash flow (after tax) of
P250,000 at end of each year would have a payback period of 3 years (P750,000/P250,000). The longer
the payback period, the less desirable the investment is. This is because, as explained earlier, the value of
the money decreases with time. Therefore, the shorter the payback period, the better the project is.

Internal Rate of Return. This is the amount of money the project will return to the company that is funding
it. It looks at the cost of the project as the capital investment and translates the profit into the interest
rate over the life of that investment. Calculations for IRR are normally done through financial calculators
and is outside of the scope of this course. Just understand that the greater the value for IRR, the more
beneficial the project is.
Opportunity Cost. This is the benefit foregone for choosing one alternative over the other. When an
organization has to choose between two projects, it’s always giving up the money it would have made on
the one it doesn’t do. That’s called opportunity cost. It’s the money you don’t get because you chose not
to do a project. The smaller the opportunity cost, the better it is.

In reality some projects are mutually exclusive−meaning, if the company adopts one proposal it would be
impossible to adopt the other proposal. Also, if it is not mutually exclusive the company must still choose
because of limited resources. In this scenario, the company would have to choose between projects using
the measures discussed.