Learn Finance · Project & Cost Finance · Task A6. Decide whether the project is worth doing — in money, before you spend any.

Drill the appraisal formulas in PMP Reps → Finance · Cost & EVM.

What it is

Before a project is funded, its business case has to show the money makes sense. The core idea is the time value of money: a dollar next year is worth less than a dollar today, so future benefits are discounted to present value.

Present value: PV = FV ÷ (1 + r)ⁿ — the building block of everything below.

Metric	What it says	Rule
NPV — net present value	PV of benefits − investment, in today's money	pick the highest; reject negative
IRR — internal rate of return	the discount rate where NPV = 0	higher is better; beat your required rate
BCR — benefit-cost ratio	PV benefits ÷ PV costs	> 1.0 is worth doing
Payback	time to recover the investment	shorter = less risk (but it ignores the time value of money)

Why it matters

It's the "should we even do this?" gate. A project can be executed flawlessly and still destroy value if the business case was negative.
It ranks competing projects. With limited funds, NPV/IRR decide which investments win.
The opportunity cost is real. Choosing this project means not doing the next-best one — its value is what you gave up.

Where you do it in VanillaPM

The Cost-Benefit calculator lives in the Pre-Initiating stage (where the business case is made) and is referenced from Project → Budget (apps/core/cba.py + CostBenefitAnalysis). A step-by-step:

Open the Cost-Benefit calculator on the business case / Pre-Initiating canvas.
Enter three things: the initial investment, a discount rate (your cost of capital — the hurdle the return must clear), and the per-period net benefits (benefit minus running cost, year by year).
Read the headline metrics. It computes NPV (today's value of all future net benefits, minus the investment — positive = worth doing), IRR (the discount rate at which NPV = 0 — compare to your hurdle), BCR (benefit-to-cost ratio — above 1.0 pays back), present value, and payback (how long until you're whole).
Check the discounted cash-flow table. Each period's net benefit is shown both nominal and discounted, so you can see why a distant benefit counts for less than a near one.
Read the "what these numbers mean" panel. A read-only explainer reads each metric back in plain English with a verdict — so the appraisal teaches as it calculates, and you can defend the recommendation, not just quote it.

Walked example — Meridian

The Meridian build costs $2,000,000 and is expected to deliver net benefits of $700,000 a year for 5 years (efficiency savings + new revenue). The required return (discount rate) is 10%.

Metric	Result	Reading
PV of benefits (700k discounted over 5y)	~$2,654,000	future benefits, in today's money
NPV	+$654,000	positive → creates value
BCR	2,654 ÷ 2,000 = 1.33	$1.33 of benefit per $1 of cost
IRR	~22%	well above the 10% hurdle
Payback	2,000 ÷ 700 ≈ 2.9 years	investment recovered inside year 3

Meridian clears the bar on every measure — positive NPV, BCR over 1, IRR double the hurdle, payback under 3 years. That's a fundable business case.

The numbers

The one that decides is NPV — it's already in today's money, so bigger is simply better (don't discount it again). BCR and IRR are useful framings of the same cash flows: BCR as a ratio, IRR as a percentage return. Payback is the weakest — it ignores everything after the payback point and the time value of money — so never use it alone.

Controls & assurance

A stated discount rate (the org's cost of capital / required return) — the whole result swings on it.
Benefits that are evidenced and owned, not optimistic round numbers.
NPV used as the decision metric, with IRR/BCR/payback as supporting views.
The opportunity cost named — what the money would do in the next-best project.

Best practices & pitfalls

Do lead with NPV; use the others to sanity-check and communicate.
Do test sensitivity — what happens to NPV if benefits are 20% lower or a year late?
Pitfall: ranking by payback alone — it favours short-term projects and ignores long-term value.
Pitfall: sunk-cost thinking. Money already spent is irrelevant to whether to continue — only future costs and benefits count.

Practise question

Q1. Two projects: A has NPV +$120k, B has NPV +$90k; both cost the same and fit the budget for only one. Which do you pick, and what's the opportunity cost of that choice?

Answer: Pick A (higher NPV). The opportunity cost of choosing A is $90k — the NPV of the next-best option (B) that you gave up. (If both were negative NPV, you'd do neither.)

Terms used here

NPV — net present value; future cash flows discounted to today, minus the investment.
IRR — the discount rate at which NPV = 0.
BCR — benefit-cost ratio = PV benefits ÷ PV costs.
Payback — time to recover the investment; ignores the time value of money.
Discount rate — the required return used to bring future money to present value.
Related: Set the cost baseline — once funded, the investment becomes the budget you control.

What the sponsor / PMO expects

A business case led by NPV at a stated discount rate, with IRR/BCR/payback as context, a sensitivity check, and the opportunity cost named. "It'll pay for itself" is a slogan; a positive NPV with a defensible discount rate is a decision.

Appraise an investment