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This chapter is from the book

This chapter is from the book

Project Selection Accounting Concepts

One area, in particular, where much overlap exists between the Initiating and Planning processes is project selection. Earlier in this chapter, you reviewed the two general categories of project selection methods—benefit measurement methods and constrained optimization methods (refer to Table 3.1)—and the key elements of each that you need to know for the PMP exam.

Also, for the PMP exam, you will need to understand several cost accounting concepts that are frequently used when performing the project-selection process, especially any of the benefit measurement methods. You are not expected to be a cost accountant or even to perform the associated accounting calculations. However, you are expected to understand each of these accounting concepts and to know how to use them during the project-selection activity. Table 3.2 summarizes these accounting concepts and how they relate to project selection.

Table 3.2 Project Selection Accounting Concepts

Accounting Concept

Description

Keys for Project Selection

Notes

Present value (PV)

Value today of future cash flows.

The higher the PV, the better.

PV= FV/(1+r)n

Net present value (NPV)

Present value of cash inflow (benefits) minus present value of cash outflow (costs).

A negative NPV is unfavorable. The higher the NPV, the better.

Accounts for different project durations.

Internal rate of return (IRR)

The interest rate that makes the net present value of all cash flow equal zero.

The higher the IRR, the better.

The return that a company would earn if it invests in the project.

Payback period

The number of time periods needed to hit the break-even point.

The lower the payback period, the better.

 

Benefit cost ratio (BCR)

A ratio identifying the relationship between the cost and benefits of a proposed project.

A BCR less than 1 is unfavorable. The higher the BCR, the better.

 

Opportunity cost

The difference in return between a chosen investment and one that is passed up.

 

 

Sunk costs

A cost that has been incurred and cannot be reversed.

This should not be a factor in project decisions.

 


In addition to the accounting concepts directly related to project selection, PMI expects a project manager to understand other accounting concepts. Table 3.3 summarizes these additional accounting concepts.

Table 3.3 Other Relevant Accounting Concepts

Accounting Concept

Description

Notes

Variable costs

A cost that changes in proportion to a change in a company's activity or business.

Example: fuel.

Fixed costs

A cost that remains constant, regardless of any change in a company's activity.

Example: lease payment.

Direct costs

A cost that can be directly traced to producing specific goods or services.

Example: team member salaries.

Indirect costs

A cost that cannot be directly traced to producing specific goods or services.

Example: insurance, administration, depreciation, and so on.

Working capital

Current assets minus current liabilities.

 

Straight-line

depreciation

A method of depreciation that divides the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.

This is the simplest method.

Accelerated

depreciation

Any method of depreciation that allows greater deductions in the (DDB) earlier years of the life of an asset.

Double declining balance.

Lifecycle costing

This includes costs from each phase of a project's or product's lifecycle when total investment costs are calculated.

 


TIP

The material on accounting concepts is an example of the non-PMBOK knowledge that is tested for on the exam.

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