In the next two lessons, we're going to work on developing a project charter. Whether you're given a project charter, whether you are asked to develop one yourself, the key is to gather the information contained in the project charter to define the project. In many organizations, the project charter is called by different names such as project frame, scoping document, etc. Or in your organization, it may not exist as a formal document at all. In many cases, the project charter is actually part of the contract the organization decides to deliver the project. This is especially true if you're part of an organization that is executing a project on behalf of a client. The contact may contain all the information or just part of it. Any information in the contract that is given, it cannot be changed without a formal contract process. Any missing information will have to be filled in by the project team. However, as stated before, it is essential that you as the project manager gather the information contained in the project charter before you kickoff the work. This will define the goals and guide the project. The inputs at the project charter are pretty straightforward. The benefits management plan, description of how and when the benefits of the project will be delivered and the mechanisms that should be in place to measure these benefits. The business case for the project, which is a documented feasibility study used to establish the benefits of the project and to justify further activity Why are we doing the project? What is its strategic and business benefits in delivering this project? Agreements. These establish the intent of the project. What are the goals for the project? What are the key results we're being asked to deliver? The environmental factors, which include the company culture, the legal framework, the customer base, and all those other external factors that influence how we deliver the project. And finally, the project organization process assets. These include the standard, the procedures that your organization has developed over time. If your company has standard templates or goodbyes for things like the project procedure manual, the project manager in plan, business case, etc., then these help us form the charter for the project. The first item we should look for in preparing the project charter is the benefits management plan. This document will help us understand the benefits the organization hopes to achieve by executing the project and how these align with the strategic plan for the organization as a whole. The benefits management plan also tells us when the organization expects to achieve these benefits. As we can see from the contents listed here, the benefits management plan is closely aligned with the business case. The business case is the next input to the project charter. The business case defines the economic basis for the project. It may compare several different options for the project or may compare one project to another. It is the basis which the organization uses to decide whether to proceed with the project and commit its limited resources to this project. Most organizations have a standard format methodology for pairing and presenting the business case. As a project manager, you should become familiar with this approach and use it for your project. I've seen many projects get rejected solely on the basis that the project manager did not conform to the standard put forward by the organization, thus making the evaluation too difficult. Next, let's take a look at some of the more common methods for pairing a business case. Three of the most common economic methods for describing project economics are: payback time, net present value, internal rate of return. The first and simplest method is the simple payback method. This is probably the method most of us use when we value our own investment decisions. Does not take into account the cost of cash nor does it calculate the return on the investment. The simple payback method is calculated by summing the cash flows over time until the cumulative total value turns positive. As we can see from this simple example, first, we list our cost by time period and then the revenue we expect over the same time period. In the next column, we calculate the net cash flow which is simply the revenue minus the cost in each period. And the last column, we calculate the cumulative cash flow. This is done by adding the net cash flow in any period to the total cumulative cash flow from the previous period. Finally, we estimate the payback time as a period when the total accumulated cash flow goes from negative to positive. In this case, it's period 4. It's simple and it tells us how long it takes to become net positive on cash. The next approach we'll use is the net present value or NPV approach. This is one of the more commonly used for project justification. The NPV approach incorporates the internal cost of cash or the discount rate into the calculation. The standard formula for net present value analysis is this rather intimidating looking but actually very simple formula. In the formula, i is the discount rate or the internal interest rate. R is the net cash flow., and N is the number of periods or life of the project. As in the earlier approach, we're looking at five time periods. We start by calculating the net cash flow or for each period similar to the simple payback approach. We divide each one of these by 1 plus the discount rate to the power or to the number of the periods. For discount rate of 10%, 1 plus the discount rate becomes 1.1. In the period 1, we divide by 1.1. In period 2, we divide by 1.1 times 1.1 and so forth. Sounds like a lot of work. Our most spreadsheet programs contain an NPV function where you enter the number of periods and the discount rate for the column or row of the net cash flow, and it calculates the NPV. This is the simplest way to approach the problem. For our simple example, the results of various discount rates in five periods are seen here. For discount rates up to somewhere between 20% and 40%, the net present value is positive, meaning the project generates profits even after paying off a loan and considering any interest earned. Many organizations will compare the net present value or multiple projects of their stated life with their internal cost to cash or discount rate to determine which projects to move forward with. The last method we'll review is the internal rate of return. The internal rate of return is the discount rate in which the net present value is zero. Today, we use the spreadsheet function to do it. In the old days, you calculate the internal rate of return by preparing a graph that the net present value versus the discount rate as shown here and plot where the line crosses zero to find the internal rate of return. Prior example, the place where the chart crosses zero or the internal rate of return is 37%. So we prepared a statement of work including the project goals or purpose, any constraints, the success criteria, and a bright description of the work. We also have the business case to indicate whether the project is economic. After developing these two key building blocks, we're ready to move forward. In the next session, we will look at what's contained in the project charter itself.
