Six Benefits of Good Project Management

The good project management will provide many benefits, including:

• Happy customers. Whether a project is for outside customers or groups within your organization, customers like to get what they want when they want it. Because the first step in project management is finding out what your stakeholders and customers want to accomplish with the project, your customers are more likely to get the results they expect. And by keeping the project under control, you’re also more likely to deliver those results on time and at the right price.
• Objectives achieved. Without a plan, projects tend to cultivate their own agendas and people forget the point of their work. A project plan ties a project to specific objectives, so everyone stays focused on those goals. Documented objectives also help you rein in the renegades who try to expand the scope of the project.
• Timely completion. Finishing a project on time is important for more than just morale. As work goes on for a longer duration, costs increase and budgets blow to bits. In addition, you may lose the resources you need or prevent other projects from starting. Sometimes time is the ultimate objective, like when you’re trying to get a product to market before the competition.
• Flexibility. Contrary to many people’s beliefs, project management makes teams more flexible. Project management doesn’t prevent every problem, but it makes the problems that occur easier to resolve. When something goes wrong, you can evaluate your plan to quickly develop alternatives—now that’s flexibility! More importantly, keeping track of progress means you learn about bad news when you still have time to recover.
• Better financial performance. Most executives are obsessed with financial performance, so many projects have financial objectives - increasing sales, lowering costs, reducing expensive recalls, and so on. Project management is an executive crowd-pleaser because it can produce more satisfying financial results.
• More productive, happier workers. Skilled workers are hard to come by and usually cost a bundle. People get more done when they can work without drama, stress, and painfully long hours. Moreover, they don’t abandon ship, so you spend less on recruiting and training replacements.

Internal Rate of Return (IRR)

The internal rate of return (IRR) is the most difficult equation to calculate of all the cash flow techniques. It is a complicated formula and should be performed on a financial calculator or computer. IRR can be figured manually, but it’s a trial-and-error approach to get to the answer.

Technically speaking, IRR is the discount rate when the present value of the cash inflows equals the original investment. When choosing between projects or when choosing alternative methods of doing the project, projects with higher IRR values are generally considered better than projects with low IRR values.

Three facts concerning IRR:

• IRR is the discount r NN ate when NPV equals zero.
• IRR assumes that cash inflows are reinvested at the IRR value.
• You should choose projects with the highest IRR value.

Net Present Value (NPV)

The benefit measurement methods involve a variety of cash flow analysis techniques including net present value.

Projects might begin with a company investing some amount of money into the project to complete and accomplish its goals. In return, the company expects to receive revenues, or cash inflows, from the resulting project. Net present value (NPV) allows you to calculate an accurate value for the project in today’s dollars.


Net present value works like discounted cash flows in that you bring the value of future monies received into today’s dollars. With NPV, you evaluate the cash inflows using the discounted cash flow technique applied to each period the inflows are expected instead of in one sum. The total present value of the cash flows is then deducted from your initial investment to determine NPV. NPV assumes that cash inflows are reinvested at the cost of capital.

Here’s the rule: If the NPV calculation is greater than zero, accept the project. If the NPV calculation is less than zero, reject the project.

Look at the two project examples. Project A and Project B have total cash inflows that are the same at the end of the project, but the amount of inflows at each period differs for each project. We’ll stick with a 12 percent cost of capital. Note that the PV calculations were rounded to two decimal places. Project A has an NPV greater than zero and should be accepted. Project B has a NPV less than zero and should be rejected. When you get a positive value for NPV, it means that the project will earn a return at least equal to or greater than the cost of capital.

Another note on NPV calculations: projects with high returns early in the project are better projects than projects with lower returns early in the project. In the preceding examples, Project A fits this criterion also.

Discounted Cash Flows

The benefit measurement methods involve a variety of cash flow analysis techniques including discounted cash flows. Money received in the future is worth less than money received today. The reason for that is the time value of money.

If I borrowed $2,000 from you today and promised to pay it back in three years, you would expect me to pay interest in addition to the original amount borrowed. If you were a family member or a really close friend, maybe you wouldn’t, but ordinarily this is the way it works. You would have had the use of the $2,000 had you not lent it to me. If you had invested the money (does this bring back memories of your mom telling you to save your money?), you’d receive a return on it. Therefore, the future value of the $2,000 you lent me today is $2,315.25 in three years from now at 5 percent interest per year. Here’s the formula for future value calculations:

• FV = PV(1 + i)ⁿ

In English, this formula says the future value (FV) of the investment equals the present value (PV) times (1 plus the interest rate) raised to the value of the number of time periods (n) the interest is paid. Let’s plug in the numbers:

• FV = 2,000(1.05)³
• FV = 2,000(1.157625)
• FV = $2,315.25

The discounted cash flow technique compares the value of the future cash flows of the project to today’s dollars. In order to calculate discounted cash flows, you need to know the value of the investment in today’s terms, or the PV. PV is calculated as follows:

• PV = FV / (1 + i)ⁿ

This is the reverse of the FV formula talked about earlier. So, if you ask the question, “What is $2,315.25 in three years from now worth today given a 5 percent interest rate?” you’d use the preceding formula. Let’s try it:

• PV = $2,315.25 / (1 + .05)³
• PV = $2,315.25 / 1.157625
• PV = $2,000
  $2,315.25 in three years from now is worth $2,000 today.

Discounted cash flow is calculated just like this for the projects you’re comparing for selection purposes or when considering alternative ways of doing the project. Apply the PV formula to the projects you’re considering, and then compare the discounted cash flows of all the projects against each other to make a selection. Here is an example comparison of two projects using this technique:

• Project A is expected to make $100,000 in two years.
• Project B is expected to make $120,000 in three years.
• If the cost of capital is 12 percent, which project should you choose?

Using the PV formula used previously, calculate each project’s worth:

• The PV of Project A = $79,719.
• The PV of Project B = $85,414.

Project B is the project that will return the highest investment to the company and should be chosen over Project A.

Payback Period

The benefit measurement methods involve a variety of cash flow analysis techniques. One famous technique in the cash flow analysis is payback period.

The payback period is the length of time it takes the company to recoup the initial costs of producing the product, service, or result of the project. This method compares the initial investment to the cash inflows expected over the life of the product, service, or result.

For example, say the initial investment on a project is $200,000, with expected cash inflows of $25,000 per quarter every quarter for the first two years and $50,000 per quarter from then on. The payback period is two years and can be calculated as follows:

• Initial investment = $200,000
• Cash inflows = $25,000 * 4 (quarters in a year) = $100,000 per year total inflow
• Initial investment ($200,000) – year 1 inflows ($100,000) = $100,000 remaining balance
• Year 1 inflows remaining balance – year 2 inflows = $0
• Total cash flow year 1 and year 2 = $200,000
• The payback is reached in two years.

The fact that inflows are $50,000 per quarter starting in year 3 makes no difference because payback is reached in two years.

The payback period is the least precise of all the cash flow calculations. That’s because the payback period does not consider the value of the cash inflows made in later years, commonly called the time value of money. For example, if you have a project with a five-year payback period, the cash inflows in year 5 are worth less than they are if you received them today.

Several limitations of the payback period are as follows:

• It assumes enough earnings to pay back the cost. If your company stops selling the product that the warranty repair project supports, the monthly savings may not continue for the calculated payback period, which ends up costing money.
• It ignores cash flows after the payback period ends. Projects that generate money early beat out projects that generate more money over a longer period. Consider two projects, each costing $100,000. Project #1 saves $20,000 each month for only 5 months. Project #2 saves $10,000 each month for 24 months. Project #1’s payback period is 5 months compared to Project #2’s 10 months. However, Project #2 saves $240,000, whereas Project #1 saves only $100,000.
• It ignores the time value of money. There’s a price to pay for using money over a period of time, just like the interest you pay on the mortgage on your house. Payback period doesn’t account for the time value of money, because it uses the project cost as a lump sum, regardless how long the project takes and when you spend the money. The measures explained in the next sections are more accurate when a project spends and receives money over time.