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Questions and Answers
What is the primary goal of strategic planning?
What does a higher NPV indicate about a project?
What is the result of subtracting project costs from benefits and then dividing by the costs?
What is the purpose of discounting expected future cash inflows and outflows to the present point in time?
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What does ROI represent?
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What is the minimum acceptable rate of return on an investment?
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How can the internal rate of return (IRR) be found?
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What is the primary purpose of a weighted scoring model?
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How are the weighted scores calculated in a weighted scoring model?
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What is the purpose of assigning a weight to each criterion in a weighted scoring model?
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Study Notes
SWOT Analysis
- SWOT analysis involves analyzing an organization's Strengths, Weaknesses, Opportunities, and Threats to determine the impact of a project on the organization.
Strategic Planning
- Strategic planning involves determining long-term objectives by analyzing an organization's strengths and weaknesses, studying opportunities and threats in the business environment, and predicting future trends.
- Strategic planning helps organizations identify and select potential projects.
Net Present Value (NPV) Analysis
- NPV analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.
- NPV indicates whether the return from a project exceeds the opportunity cost of capital.
- Projects with higher NPVs are preferred to projects with lower NPVs if all other factors are equal.
NPV Considerations
- Some organizations refer to the investment year(s) for project costs as Year 0 instead of Year 1 and do not discount costs in Year 0.
- The discount rate can vary, based on the prime rate and other economic considerations.
- Costs can be entered as negative numbers instead of positive numbers, and costs can be listed before benefits.
- Project managers should check their organization's preferred approach to calculating NPV.
Return on Investment (ROI)
- ROI is the result of subtracting the project costs from the benefits and then dividing by the costs.
- ROI is always a percentage, and the higher the ROI, the better.
- Many organizations have a required rate of return for projects—the minimum acceptable rate of return on an investment.
- The internal rate of return (IRR) can be found by finding what discount rate results in an NPV of zero for the project.
Payback Analysis
- Payback analysis answers the question of how long it takes for a project to generate enough cash to pay back its initial investment.
- Payback analysis can be used in conjunction with NPV and average annual return to evaluate projects.
Weighted Scoring Models
- A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria.
- To create a weighted scoring model, identify criteria important to the project selection process, assign a weight to each criterion, assign numerical scores to each criterion for each project, and calculate the weighted scores.
- Weighted scoring models help organizations make informed decisions about which projects to select.
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Description
Learn about strategic planning, SWOT analysis, and its importance in business. Understand how to analyze strengths, weaknesses, opportunities, and threats to make informed decisions.
