Archive for April, 2010

NPV Reloaded

Surprisingly, my blog post NPV explained in simple words has been the most viewed page on my blog, so far. Wow! I have just resumed my MBA studies at the OUBS (will write more about that soon), with the Financial Strategy course, which takes a lot of these appraisal techniques to the next level.  So I thought maybe you’d like to hear a few more thoughts on NPV and how this can be applied in your business lives, too.

To recap, Net Present Value (NPV) is a financial appraisal technique which discounts all expected cash flows of an investment (e.g. a project with all related costs such as development, rollout, maintenance,…) to today’s value of money. If you get an NPV of zero, this means you will be able to get the expected level of return (the one which you used to discount your cash flows) and could go ahead with the investment. Of course, the larger the positive sum of the NPV, the better. From a pure financial perspective, you should reconsider investments with a negative NPV. So far, so good.

There are several limitations of this model. One of it is that you are only considering one scenario (usually, the most likely one). As all of the cash flows are futuristic, and a bigger portion of them usually uncertain (like expected cash inflows from sold products or actual maintenance costs occurring), the NPV concept has been expanded to ‘Expected NPV’.

The idea is very simple but quite powerful as it allows you to better take the real world and potential scenarios into account:

  1. Decide on a range of scenarios you’d like to cover.
    Typically, in a project context this would be something like ‘Best Case’, ‘Most likely’, and ‘Worst case’.
  2. Assign probabilities to the identified scenarios. Make sure all the probabilities add up to 100% ;)
    For example:

    Best case:   20%
    Most likely: 60%
    Worst case:  20%
  3. Calculate the NPV for each of the scenarios.
  4. Calculate the arithmetic mean NPV, which is simpler than it sounds: Just multiply each individual scenario’s NPV with its probability and add it all up:
    Best Case:   NPV = 10.000EUR * 0.20 =  2.000EUR
    Most likely: NPV =  5.000EUR * 0.60 =  3.000EUR
    Worst Case:  NPV = -1.000EUR * 0.20 = -  200EUR
    -----------------------------------------------
                 Resulting Expected NPV =  4.800EUR
    ===============================================

Aside from getting a EUR/USD/GBP amount out of it, the process alone will help you getting a better feeling for your project. Have a look at the scenarios – how widely are they spread, how symmetrical are they w/ regards to their probability and outcome? Any extreme values? As always, calculate and interpret in brain-on mode!

Usually, NPV will be used in the early stages of the project and should be part of the business case brought forward. In the Prince2 world, it should be completed by the end of the ‘Initiate a project’ stage where the Business Case is verified and baselined.

How common is NPV in the project appraisal and authorization processes in your organization? Please participate in the poll below.

April 28, 2010 at 11:14 Leave a comment

No Prince2 manual on the iPhone?!

So I bought this heavily DRM-restricted Prince2 2009 PDF for roughly 100 EUR. It is easy to read on the laptop. So far, so good. I didn’t try printing it yet.

Now I thought, wouldn’t it be nice to be able to read it on my iPhone, too? This way I could look things up quickly, or read a few pages on the subway.

After quite some time google-ing around I’ve come to the conclusion that it is not possible at the moment to read Adobe Digital Editions DRM PDFs like the Prince2 2009 manual on the iPhone. The main reason seems to be that Adobe can’t get Flash to work on the iphone. Apart from these technical issues they seem to be unwilling to cooperate with an existing app like Stanza to make their books accessible from the iPhone. If anyone knows a solution, I’d be glad to hear!

The only ‘mobile’ solution for me is then to print it out and carry a heap of paper around all the time ;) (Where the DRM kicks in nicely, as you can print only one copy which will look really messy soon. Oh boy…)

All in all, really annoying! Lesson is learned – be careful with the format of eBooks you’re buying, and check beforehand for available readers on the platforms you need. Grrrr. Why can’t computer stuff just work for a change? Does it always have to be so complicated for consumers?

April 21, 2010 at 20:23 3 comments

Prince2 2009 – What a pleasant surprise!

Though I got my Prince2 certification in 2002, I was more involved with PMI in the last few years. I wanted to refresh my Prince2 knowledge lately, so I bought the Prince2 2009 PDF guide (in German). Thanks Andreas for the link! (See for all available languages here). And what should I say… I was really really surprised. Positively!

There is only one little downer: The DRM (digital rights management) on the PDF document is pretty tight. For close to 90 EUR it is not exactly a bargain, but you can only read it in Adobe Digital Editions with your personal ID, and you’re allowed to print it ONCE. Fingers crossed the printer has a good day when you try it. Mac users be aware – doing ‘Print Preview’ counts as printing already. Ummm.

Now back to the guide and methodology: From my ‘first contact’ with Prince2 at the beginning of the 2000’s, I remembered it as being a really academic read, very bureaucratic process,… The new guide is really easy to digest – nicely structured, modern layout, linked, etc. The content feels much closer now to real project life.

I also like the new method construction with the ‘principles’ and the ‘themes’ and that the authors made very explicit that it is more important to live the principles rather than mechanically following some documented process in brain switched-off mode. What is also nice are things like specific guidance on tailoring / scaling the methodology based on certain project types (more than 20 pages).

So much for my first impressions. Good job, OGC folks! And b.t.w. there is a nice vodcast from Andy Murray here (plus others).

April 12, 2010 at 09:49 2 comments


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