It’s the responsibility of the management team of an organization to analyze a received project in terms of its finance prior to accepting / rejecting it. In order to do so, there are certain Project Finance Analytical Methods / concepts that have been designed to follow to make decisions based on the financial results the concepts result on.
Below template template has been developed to analyze a project using Return On Investment (ROI), Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period. The steps that need to be followed in order to use the template are mentioned in the template itself.
When an organization receives a project, it’s necessary to find out how worth it will be for the organization in terms of finance if the project is officially accepted. In order to analyze this, the portfolio / project / program management team has to go through a Project Financial Analysis process in order to calculate how much of a cash flow the organization receives throughout the project.
There are few concepts that have been developed to calculate and sort out this matter. Among those concepts, four concepts will be explained below. (A separate template has been designed by the author to calculate and analyze a project based on below 4 concepts)
Return on Investment (ROI)
It is a financial analytical method that compares the difference between the profit value and the cost of investment that can be earned and lose via a project . This is calculated as a percentage value. Higher the percentage, better the result.
Net Present Value (NPV)
This is a method used to evaluate investments where the net present value of all the cash inflows and outflows is considered under a given discount rate (which is the required rate of return). The project can be accepted if it produces a positive net present value.
Internal Rate of Return (IRR)
It is the discount rate at which the net present value of all the cash inflows and outflows of a particular project equals to zero. This is almost the same as Net Present Value concept. Higher the IRR, better the outcome, hence it’s recommended to select the project with the highest Internal Rate of Return value.
It is the time period required to recover the funds expended in an investment. The payback period will indicate how long it will take for the project / organization to cover / match the expenses from an initial investment. It’s recommended to go for the project that will support the organization to recover the incurred expense within a shortest time possible.