Planning and Managing Project Finance — PMP Study Guide

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Included in this chapter:

The layered budget: baseline and reserves
Sizing reserves from quantified risk
Funding, cash flow, and funding-limit reconciliation
Funding adaptive work: pay for value incrementally
Tracking spend and monitoring financial variation
Justifying the investment: NPV and appraisal methods
Exam-pattern recognition

Investment appraisal methods compared

Property	Net present value (NPV)	Internal rate of return (IRR)	Benefit-cost ratio (BCR)	Payback period
What it reports	Today's value of net cash flows, in currency	The discount rate at which NPV = 0, as a percent	Present value of benefits divided by present value of costs	Time until cumulative returns repay the cost
Decision rule	Higher, and above zero, is better	Higher, and above the cost of capital, is better	Above 1 is worthwhile	Shorter is better
Time value of money	Captured	Captured	Captured	Ignored
Key limitation	Needs a chosen discount rate	Can mislead on non-standard cash-flow patterns	Sensitive to what is counted as benefit versus cost	Blind to every cash flow after payback

Decision tree

Cheat sheet

Cheat sheet

The cost baseline is the approved budget excluding management reserve
The cost baseline is time-phased so spend can be tracked
Reconcile planned spend against periodic funding limits
Contingency reserves fund identified risks and sit inside the baseline
Management reserve covers unknown-unknowns and needs approval to use
Size the contingency reserve from quantified risk exposure
Escalate cost overruns beyond tolerance to the funding authority
Report financial variations to governance on the agreed cadence
Adaptive delivery funds the next increment on demonstrated value
Iteration funding fixes cost and cadence while scope flexes
Define financial reporting format and cadence during planning
Anticipate external factors that threaten future funding
Align cash-flow timing with the funding schedule
NPV is the strongest comparator because it captures the time value of money
Appraisal decision rules: NPV, IRR and BCR higher is better; payback shorter

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References