Project Management Techniques: Payback, NPV, IRR, Crashing, Restructuring, and Respecifying

PROJECT
MANAGEMENT

TABLE OF CONTENTS
QUESTION 3...................................................................................................................................1
a) Payback..............................................................................................................................1
b) Net present value (NPV)....................................................................................................1
c) Internal rate of return (IRR)...............................................................................................1
QUESTION 4...................................................................................................................................4
a) Crashing the network..........................................................................................................4
b) Restructuring the network..................................................................................................5
c) Respecifying the project.....................................................................................................6
REFERENCES................................................................................................................................8

QUESTION 3
a) Payback
Payback period is the time (number of years/months/days) required to recover invested
amount. It is the simple method which can be used easily in order to analyze the reliability of a
project (Heydt, 2017). However, on the critically note, the method completely ignore time value
of money.
b) Net present value (NPV)
NPV is the difference between present value of cash inflow and outflow for the chosen
project. With the help of this method, company can make investment planning in order to
determine the profitability of a project investment (Batra and Verma, 2017). NPV comply with
time value of money concept and also assist management of company in better decision-making.
On contrary side, it can be challenging while undertaking the discount rate because it might
represent the investment's true risk.
c) Internal rate of return (IRR)
IRR is used to estimate the probability of potential investment where NPV of all the cash
flows is equal to zero during the discounted cash flow analysis. The method assist to make the
decision of a company easier but it is somewhat limited and only be used to compare the project
who are similar size and scope only.
Illustration: Benz's is the manufacturing firm in UK who want to invest into two project in near
future. The initial investment for Project A is £50000 while Project B is £ 70000. The cost of
capital for the given case is 10%. However, cash inflows for the years 5 years are as follows:
Years
Project
A
Project
B
1 10000 25000
2 12000 25000
3 15000 23000
4 16000 27000
5 20000 30000
1