Intro to Project Management: Project Selection and Initiation - Business Case, Problem/Opportunity Analysis Recommendation Evaluation

What This Is

The Business Case is a critical component of project management that helps stakeholders understand the justification for a project. It involves identifying a problem or opportunity, analyzing it, making recommendations, and evaluating the potential outcomes. A real-world example is a company deciding to launch a new product line. The Business Case would involve analyzing market trends, customer needs, and potential revenue streams to determine whether the product line is viable and worth investing in.

Key Terms & Formulas

• Problem/Opportunity Statement: A clear and concise description of the issue or opportunity that the project aims to address.
• Cost-Benefit Analysis: A method used to evaluate the potential costs and benefits of a project.
• Return on Investment (ROI): A measure of the return on investment, calculated as (Gain from Investment - Cost of Investment) / Cost of Investment.
• Break-Even Analysis: A method used to determine the point at which the project's revenue equals its costs.
• Payback Period: The time it takes for the project to recover its initial investment.
• Net Present Value (NPV): A measure of the present value of a project's future cash flows, calculated as the sum of the present values of each cash flow.
• Internal Rate of Return (IRR): The rate at which the project's NPV equals zero.
• Sensitivity Analysis: A method used to evaluate how changes in assumptions affect the project's outcomes.
• Decision Tree Analysis: A method used to evaluate different courses of action and their potential outcomes.
• Expected Monetary Value (EMV): A measure of the expected value of a project, calculated as the sum of the products of each outcome's probability and value.
• EV = % complete × BAC (Earned Value = percent complete times Budget at Completion).
• CV = EV / BAC (Cost Variance = Earned Value / Budget at Completion).
• SV = EV - AC (Schedule Variance = Earned Value - Actual Cost).

Step-by-Step / Process Flow

1. Identify the Problem/Opportunity: Clearly define the issue or opportunity that the project aims to address.
2. Gather Data: Collect relevant data and information to support the analysis.
3. Analyze the Data: Use various methods (e.g., cost-benefit analysis, break-even analysis) to evaluate the potential outcomes.
4. Make Recommendations: Based on the analysis, make recommendations for the project.
5. Evaluate the Recommendations: Assess the potential risks and benefits of each recommendation.
6. Present the Business Case: Clearly communicate the Business Case to stakeholders, including the problem/opportunity statement, analysis, recommendations, and evaluation.

Common Mistakes

• Mistake: Failing to clearly define the problem/opportunity statement. Correction: Ensure that the problem/opportunity statement is specific, measurable, achievable, relevant, and time-bound (SMART).
• Mistake: Not considering all relevant costs and benefits. Correction: Conduct a thorough cost-benefit analysis to ensure that all relevant costs and benefits are considered.
• Mistake: Not evaluating the potential risks and benefits of each recommendation. Correction: Use sensitivity analysis and decision tree analysis to evaluate the potential risks and benefits of each recommendation.

Exam Tips

• Tip: Be able to clearly define the problem/opportunity statement and explain its importance.
• Tip: Understand the different methods used for cost-benefit analysis and be able to apply them to a scenario.
• Tip: Be able to evaluate the potential risks and benefits of each recommendation using sensitivity analysis and decision tree analysis.

Quick Practice Questions

1. If the CPI is 0.8, is the project under or over budget? Answer: Under budget. Explanation: CPI (Cost Performance Index) is calculated as EV / AC. If CPI is 0.8, it means that the project is earning 80% of its budgeted value, indicating that it is under budget.
2. What is the formula for calculating the ROI? Answer: (Gain from Investment - Cost of Investment) / Cost of Investment. Explanation: This formula calculates the return on investment by subtracting the cost of investment from the gain from investment and dividing by the cost of investment.
3. What is the purpose of sensitivity analysis? Answer: To evaluate how changes in assumptions affect the project's outcomes. Explanation: Sensitivity analysis is used to evaluate how changes in assumptions (e.g., cost, revenue, time) affect the project's outcomes.

Last-Minute Cram Sheet

• Problem/Opportunity Statement: A clear and concise description of the issue or opportunity that the project aims to address.
• Cost-Benefit Analysis: A method used to evaluate the potential costs and benefits of a project.
• ROI = (Gain from Investment - Cost of Investment) / Cost of Investment
• Break-Even Analysis: A method used to determine the point at which the project's revenue equals its costs.
• Payback Period: The time it takes for the project to recover its initial investment.
• NPV =? (PV of each cash flow)
• IRR: The rate at which the project's NPV equals zero.
• Sensitivity Analysis: A method used to evaluate how changes in assumptions affect the project's outcomes.
• Decision Tree Analysis: A method used to evaluate different courses of action and their potential outcomes.
• EMV =? (Probability × Value of each outcome)
• EV = % complete × BAC
• CV = EV / BAC
• SV = EV - AC
• Decomposition breaks down work, not activities – it creates the WBS, not the activity list.
• Scope creep occurs when the project scope is changed without a corresponding change in the project budget or timeline.