NPV takes into account the time value of money by discounting future cash flows back to their present value. This metric provides management with a comprehensive understanding of the financial viability and profitability of the entire project portfolio. It considers both the magnitude and timing of cash flows associated with each project, allowing management to assess the overall value that the portfolio is expected to generate over time.
On the other hand, while option D, "Expected return divided by total project cost," provides a measure of return on investment (ROI) for each project, it does not account for the time value of money or the interdependencies between projects within the portfolio. Therefore, NPV, which accounts for these factors, would be a more comprehensive and informative metric for management to consider during the review of a project portfolio.
B. Net present value (NPV) of the portfolio: This metric considers the time value of money, taking into account the projected cash inflows and outflows of all projects within the portfolio over their lifespans. A positive NPV for the portfolio indicates that the anticipated benefits outweigh the costs, making it a valuable indicator of the portfolio's overall financial performance and potential value creation.
Option D, i.e., expected return divided by total project cost, is the most useful metric because it considers both the project's cost and expected ROI. This metric helps management evaluate the value and profitability of each project and make informed decisions about which projects to invest in or continue. Additionally, it enables management to compare projects with different costs and expected returns, providing a more comprehensive view of the portfolio's overall performance and potential profitability
total cost of each project, is a useful metric to determine how much each project costs. However, it does not consider the expected benefits or return on investment (ROI) of each project.net present value (NPV) of the portfolio, is an excellent metric to assess the portfolio's value and whether it is worth investing in. However, it does not consider individual project performance or expected ROI.cost of projects divided by total IT cost, is useful to determine the percentage of IT cost allocated to each project. However, it does not consider the expected ROI of each project.
https://www.pmi.org/learning/library/proven-project-portfolio-management-process-8503
Value and Financial Metrics
The most common financial metric companies use is ROI (Return on Investment) to measure the value of their projects. Traditionally, ROI goes beyond simple payback, or determining when the investment will pay for itself. It uses metrics such as net present value and the internal rate of return—which consider the value of money invested over time and the cost of the company's capital—to compare the cost of implementing an IT project with the financial benefits it provides. Depending on the project, those results can be operating-cost reductions, revenue growth, or both. The benefits may be evident in months or could take years.
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