PMP lesson · Project Initiation & Business Value · Starting the project · lesson 2 of 4 · about 8 minutes
Business case, benefits and project selection (NPV, payback)
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Goal: After this lesson you can read a business case, compare projects using NPV, IRR, payback and benefit-cost ratio, and ignore sunk costs.
1The situation
Two projects, one budget
The plant can fund only one investment: robot cell X or automated warehouse Y. X creates more value over its life; Y pays back faster. The CFO asks for a recommendation.
Six months later, a different question: halfway through another project, finishing will cost more than its remaining benefits, but the sponsor says: “We've already spent $2.1 million; we must finish.”
Both questions are answered by the business case, and by thinking only about the future.
2Why the project exists
The business case explains why the project is worth doing: the need, the options considered, costs, benefits and risks. The benefits management plan explains how and when benefits will be realised and measured, and who owns them.
Projects exist to deliver value. If the business case stops being valid (market change, strategy change, costs explode), the PM raises it with the sponsor for a governance decision.
3The financial measures
Measure
What it tells you
Choose…
NPV (net present value)
Value created, in today's money
Highest NPV (above 0)
IRR (internal rate of return)
The project's effective interest rate
Highest IRR (above the required rate)
Payback period
How long until the investment is recovered
Shortest (but ignores later benefits)
Benefit-cost ratio
Benefits ÷ costs
Above 1; the higher the better
Opportunity cost
Value of the option you give up
= value of the project not chosen
Sunk costs (money already spent) are ignored in decisions about the future.
Know what each measure tells you, and its weakness.
4How it looks on the exam
Exam-style question 1. Two mutually exclusive projects are proposed. Project X has an NPV of $420,000 and a 4-year payback. Project Y has an NPV of $310,000 and a 2-year payback. The policy is to create the most value. Which should be selected?
A. Y, because it pays back faster
B. X, because it has the higher NPV
C. Y, because shorter payback means lower risk
D. Either, since both NPVs are positive
Show the answer and the decode
Answer: B.
In simple English
Choose one of two projects by value.
What is the question really asking?
The right choice.
Key words / trigger
“create the most value”
PMP logic
NPV measures value created; choose the higher NPV.
Why the wrong answer looks attractive
Fast payback feels safer, but it doesn't measure total value.
5Remember this
Your memory card
Business case = why; benefits plan = how value is realised and measured
Choose by value: highest NPV (or IRR); payback ignores later benefits
Opportunity cost = value given up · Sunk cost = ignore
If the business case breaks, raise it with the sponsor