PMI-ACP Lesson 08 Nugget 1 Agile & Scrum Value-based Prioritization

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PMI® & ACP are the registered marks of Project Management Institute, Inc. Copyright 2014, Simplilearn, All rights reserved.
Value-based Prioritization–I
PMI®—Agile Certified Practitioner (PMI-ACP)®

● Explain the concept of time value of money
● Take project decisions based on NPV, IRR, ROI, and payback period of a
project
After completing
this lesson, you will
be able to:
Objectives

All projects require some forecasting, even the most Agile organization will require budgets and
forecasts of the expected costs. Forecasting the financial value of a project is the responsibility of the
product owner, but it is also a shared responsibility of the project team.
Forecasting

Time value of money suggests that money has different value over time, due to inflation and other
factors; money now is worth more than money later on. Determining the time value of money
requires knowing the following terminologies:
Time Value of Money—Terminologies
An amount of money at some future time period.
An amount of money today, or the current value of a future cash flow.Present Value
Future Value
A length of time (often a year, but can be a month, week, day, hour, etc.).Period
The compensation paid to a lender (or saver) for the use of funds, expressed as a
percentage for a period (normally expressed as an annual rate).
Interest Rate

The formula to calculate future value is:
The present value can be calculated by turning around the future value formula:
Calculation of Future Value and Present Value
 FV PV iN
N
 1
  10.13310.01100
3
3 FV
i)+(1
FV
=PV N
PV = Present Value of a sum of money
FV = Future Value of a sum of money
N = Number of years
i = interest rate

Calculation of Future Value—Example
 FV3
3
100 1 0 10 13310  . .
If you have $100 today and you wish to invest it for 3 years for an interest rate of 10%,
how much will you have earned at the end of third year?
Q
$100 today is worth $133.10 in three years with a 10% interest rate compounded annually.
A
Let us see an example for calculating of future value:

A business case is used to help the organizations to select a project from various projects. A business
case is meant to justify a project or features to be included within the product in that project, from
the point of view of the business benefits derived. Business cases help in the project selection:
● It reflects the expected benefits and anticipated costs of the project.
● It should include a high level SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis.
● It identifies the key stakeholders.
Business Case
The participants of business case should be the users, the product owner, the management, and the key
stakeholders.!

Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an
investment or to compare the efficiency of a number of different investments.
● Many organizations have a required rate of return or minimum acceptable rate of return on
investment for projects. The formula to calculate ROI is:
Return on Investment
Costs
Costs–benefitsProjected
ROI 
Higher the ROI, the better.

Net Present Value (NPV) is a method of calculating the expected net monetary gain or loss from a
project by discounting all the expected future cash inflows and outflows to the present point in time.
● NPV is a measure of how much money a project can be expected to return (in today’s value).
● NPV is used to compare and prioritize projects.
Net Present Value
Higher the NPV, the better.
NPV = (Present Values of the Expected Monetary Gains)
- (Present Values of the Costs)

If the NPV is positive, accept the project.
● A positive NPV means that the project is expected to add value to the firm and will therefore
increase the wealth of the owners.
● Since the goal is to increase owners’ wealth, NPV is a direct measure of how well the project
meets the goal.
Net Present Value—Decision Rule

Net Present Value—Example
Given below are the details of two projects and their cash flow for a period of five years at
an interest rate of 10 percent. Which project would you select?
Q
Let us see an example:
The cash flow of both
the projects are the
same, but NPVs are
different.

Internal Rate of Return (IRR) shows the interest rate at which the Net Present Value becomes zero.
● The IRR is usually established by a company as the minimum threshold a project must exceed to be
considered viable. Usually this threshold is the point at which equity holders would receive a
higher return than if they allowed the investment to simply collect interest.
● IRR is used to compare projects; project with a higher IRR is preferred.
Internal Rate of Return
Higher the IRR, the better.
ra = lower discount rate chosen
rb = higher discount rate chosen
Na = NPV at ra
Nb = NPV at rb
)r-(r
NPV-NPV
NPV
rIRR ab
ba
a
a 

Internal Rate of Return—Example
Project A has an investment of $200,000 and generates an IRR of 27%. Project B has an
initial investment of $100,000 and an IRR of 43%. Which project would you choose?
Q
Project B has a higher IRR and should be selected before Project A.
A
Let us take a look at an example:

The payback period is the amount of time it will take to recoup, in the form of net cash inflows, the
net amount invested in a project.
● The primary advantage of this method is that the calculations and interpretation are
straightforward.
● The second advantage is that the payback period measures the amount and duration of financial
risk taken by the organization.
● Many organizations want IT projects to have a fairly short payback period.
Payback Period
Larger the payback period, riskier the project.

Summary of a project’s financial measures for a period of 5 years is given below:
NPV, ROI, Payback Period—Example
Costs
Costs)–(benefits)Savings(Projected
ROI 
)r-(r
NPV-NPV
NPV
rIRR ab
ba
a
a 
NPV = (Present Values of the Expected
Monetary Gains) - (Present Values of the
Costs)

Quiz

QUIZ
a.
b.
c.
d.
Project A has NPV of 330 and Project B has NPV of 300 and Project C has NPV of 280.
Which project would you select?1
Project B
Project A and Project B
Project C
Project A

QUIZ
a.
b.
c.
d.
Project A has NPV of 330 and Project B has NPV of 300 and Project C has NPV of 280.
Which project would you select?1
Answer: a.
Explanation: Select the Project with a higher NPV. Project A has the highest NPV and it is
selected.
Project B
Project A and Project B
Project C
Project A

QUIZ
a.
b.
c.
d.
If you want to invest $200 for 5 years at the interest rate of 20%, how much would you
HAVE at the end of the second year?2
88
112
288
220

QUIZ
a.
b.
c.
d.
2
Answer: d.
Explanation: Using the formula for calculation of Future Value, 200 (1+0.2)^2 = 288.
88
112
288
220
If you want to invest $200 for 5 years at the interest rate of 20%, how much would you
HAVE at the end of the second year?

● Present value is the amount of money today, or the current value of a
future cash flow. Future value is the amount of money at some future time
period.
● Thumb rule for decisions: Select the project with higher ROI, IRR, NPV, but
lower payback period.
Summary
Here is a quick
recap of what was
covered in this
lesson:

PMI-ACP Lesson 08 Nugget 1 Agile & Scrum Value-based Prioritization

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