Net Present Value
Cost  NPV: Total benefits less costs
Management
Definitions
 Value analysis or value engineering is used to
reduce cost while improving quality and
performance
 The concept of factoring overall “after-the-project”
costs such as maintenance and service is called life
cycle costing
Budget estimates
 Order of magnitude completed during initiating
 Budget completed during planning
 Definite completed during late planning (cost
baseline)
Estimating Methods
 Expert judgment is an analogous estimating. Gives
the PM an idea of what the project will cost
 Team creates the estimate from WBS giving more
accurate estimates: Bottom up estimating
 Since bottom up estimate is done based on the
WBS defined by the team, it gains buy-in
 Mathematical model bases on unit price:
parametric estimating
 Two types of parametric estimating: regression
analysis and learning curve
Present Value
 What is the present value (value today) if we
expect to make $25,000, two years from now, if
the annual interest rate is 15%?
Fórmula: PV= FV(1+R)n
PV = 25000(1+.15) 2
PV = $33,062.50
 NPV = present value of cash inflow minus the initial
investment
Project selection tools
 BCR.
 ROI
 IRR
 NPV
Benefit Cost Ratio (BCR)
 BCR < 1 then cost are greater than benefits
 BCR > 1 then benefits are greater than costs
 BCR = 1 then benefits equals cost
 BCR is also called Profitability Index
 Total costs as compared with the increased revenue
that will accrue over the life of the project
deliverable is called Return of Investment
 Time to recover costs is called: payback period
 The cost of giving up one project over another is
Opportunity cost
 Measures the investment’s return on project
profitability: Internal rate of return (IRR)
Project A recovered its costs in 5 years which is considered its
payback period. Project A’s cost was $3.0M and is expected
to bring $50M revenue during its lifetime.
A PM decides to select a $7,000 contract over a $4,000
contract, his opportunity cost was $4,000
Project A cost $2.5M and is expected to bring in $30M
revenue during its lifetime. The ROI is expected to be $27.5M
Cost types
 Costs that vary depending upon the activity being
done on the project: variable cost
 Costs that remains constant independent of the
activity on the project: fixed cost
 Costs that result from work on a specific project and
cannot be shared with other projects: direct costs
 Costs incurred for the benefit of more than one
project: indirect costs also called overhead cost
Assigning twice the resources but only improving the output
by 10% is an example of the law of diminishing returns
 Cost
Management