There are many projects that could be initiated in an organization. However, it is not always the best choice. Project constraints can limit the execution of potential projects. Project selection methods are used, as described in PMP training. The most popular approach to benefit measurement selection is the economic model option.

Comparative Approach, also known as Benefit Measurement Methods, is a method that assesses projects based upon the revenue, profits, or benefits. There are four types:

Murder board

Peer review

Scoring models

Economic model

Take part in our 100% online & self-paced 1-hour PMP training.

The economic model is the most essential of the four types. It is used by most companies that want to initiate a project. We will be discussing the economic model for project selection, and then illustrating the five options for using it with the examples. You will learn more about the different types of the economic models in the PMP certification training.

Economic Model #1: Present Value

The economic model of present value calculates the future value of money and how it will be paid or retrieved. Because a dollar today is worth more than a penny tomorrow, there is also a time value to money.

The main idea behind this economic model is that if you have money now, then you can invest in other instruments. You can invest in shares of companies, interest, etc. You will have more money in the future if you invest in an instrument. The value of the money you receive or pay in the future will be lower than today.

The Present Value economic model calculates future cash flows’ value today. For calculating the present value, interest rates are generally used.

The formula for the Present Value Economic Model

Present Value equals the future value of money divided by one plus the interest rate over “n”. This formula uses PV to represent present value, FV to indicate future value, and r to indicate interest rate.

Let’s look at a sample scenario to better understand the present value economic model. Let’s say that you have three installments for your project.

1st installment: $100,000. This will be paid at the beginning of your project.

Second installment: $100,000. This will be paid at year’s end.

Third installment: $100,000. This will be paid at end of 2nd Year.

The interest rate is 10% per annum

The 1st installment will be paid at the start of the project. Its present value will be the same as its actual value.

The second installment is due at the end of the first calendar year. We can substitute the future value, the interest rate, and the number of periods in this formula to find the present value for the second installment at $90,909.

The 3rd installment is due at the end 2nd year. We can substitute the formula values to find the present value of the third installment at $82,645.

Total money that will be recovered from the customer is $300,000. However, because it will be retrieved over time and present value is $273,554,

Economic Model #2: Net Present Value

Your entry was not saved. Please try again. We have sent you links! You should have already received an email from masterofproject.com. If you have not received an email from us, please check your spam folders. You can also add masterofproject.com on the safe senders list to continue receiving our emails. The net present value economic model calculates the total inflows and outputs of a project to calculate its net results. It uses present value calculations. This economic model is the Present value of all benefits (revenue, income) minus costs over many time periods. The net present value economic model is abbreviated to NPV.

If the Net present value for a proje