- Internal rate of return (IRR). Calculating the IRR answers
the question: How rapidly will the money be returned? It’s
a calculation of the percentage rate at which the project
will return wealth. It’s roughlyanalogous to the effective
yield of a savings account. - Payback period.Calculating this metric (also known as
time to money orbreakeven point) answers the question:
When will the original investment (the amount spent on
the project) be recovered through benefits? It’s typically
expressed in months or years. - Cash hole.Calculating the cash hole (also known as the
maximum exposure) answers the question: What’s the
most we’ll have invested at any given point in time? It’s
expressed in terms of dollars.
Performing a Financial Analysis (or Cost vs. Benefit Analysis)
Each of the four financial metrics identified above can be deter-
mined by performing a financial analysis. Although you may
not be intimately involved in performing a complete financial
analysis, as a savvy project manager you should understand
how it’s done and the terminology involved. The basic financial
analysis process is not as difficult as many think. It consists of
four basic steps.
Step 1: Identify the Sources of Cash Flows (Inflows and
Outflows). Executing a project causes money to flow out and
in. Cash inflowsare any financialbenefits that can be claimed
60 Project Management
Net present valueThe value in present dollars of all cash
flows expected in the future from a project.
Internal rate of return The percentage rate at which the
project will bring a return on the investment.
Payback period Also known as time to money orbreakeven point,the
number of months or years the project will take to recover the original
investment.
Cash hole Also known as the maximum exposure,the most money that
will be invested in the project at any point.