« Budding Fashion Designer | Risk Management in Projects » |

Have you been in a situtation where you need to justify or quantify benefits for your projects? Here are some terms to help you:

**Benefit Cost Ratio (BCR)**: As the term suggests, it is the ratio of benefits to Cost.

BCR = Benefits/Cost

Example: The projected benefit of an IT project is $1 Million and the cost is $500,000. The BCR= 2.

**Opportunity Cost**: MSN Money defines Opportunity Cost as "The cost of passing up one investment in favor of another." This concept can be used in measuring benefits for projects by asking "What is the cost of missing out on other opportunities because money was invested in this project?" To be able to show that the Opportunity Cost is small is good because no one wants to miss out on a big opportunity.

**Return on Investment (ROI)**: This is a very common term. It is the percentage the shows what return is made for a particular investment. The formula is:

ROI = (benefits - cost) / benefits

Example: An IT project costs $200,000 and the computed benefits of doing this project is $230,000. The computed ROI is 15%

**Net Present Value (NPV)**: Investopedia defines NPV "An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows." This is based on the concept of Present Value (PV). PV according to the definition of The Concise Encyclopedia of Economics is the value today of an amount of money in the future. The simplified formula is:

NPV = PV-cost

Example: The IT project has a PV of $500,000 with a cost of $300,000. Then the NPV is $200,000.

To put it in the context of project justification, the bigger the NPV, the better for the project.

**Internal Rate of Return (IRR)**: investorwords.com defines IRR as "The rate of return that would make the present value of future cash flows plus the final market value of an investment or business opportunity equal the current market price of the investment or opportunity." You can refer to Investment FAQ on how to compute for IRR. For project justification, the basic concept is, the bigger the IRR, the better.