Module 1 Fundamentals of project initiation

Key components of project initiation

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Performing a cost-benefit analysis

Previously, you learned that a cost-benefit analysis is the process of adding up the expected value of a project—the
benefits—and comparing them to the dollar costs. In this reading, we will discuss the benefits of conducting a cost-
benefit analysis, guiding questions to help you and your stakeholders conduct one, and how to calculate return on
investment (ROI).

The benefits of a cost-benefit analysis

A cost-benefit analysis can minimize risks and maximize gains for projects and organizations. It can help you
communicate clearly with stakeholders and executives and keep your project on track. Because this type of analysis
uses objective data, it can help reduce biases and keep stakeholder self-interest from influencing decisions.

Comparing a project’s benefits to its costs can help you make a strong business case to stakeholders and leadership and
ensure your organization pursues the most profitable or useful projects. Organizations use cost-benefit analysis to
reduce waste and invest their resources responsibly.

Guiding questions for a cost-benefit analysis

When you’re pursuing a project, the benefits should outweigh the costs. It’s important for you and your stakeholders
to consider questions like the ones that follow early on, while you prepare the proposal.

To determine the benefits of a project, you might ask:

 What value will this project create?

 How much money could this project save our organization?
 How much money will it bring in from existing customers?
 How much time will it save?
 How will it improve the customer experience?
And to determine the costs of a project, consider questions such as:

 How much time will people have to spend on this project?

 What are the one-time costs?
 Are there any ongoing costs?
 What about long-term costs?
You might also consider questions about intangible benefits. These are gains that are not quantifiable, such as:

 Customer satisfaction. Will the project increase customer retention, causing them to spend more on the company’s
products or services?
 Employee satisfaction. Is the project likely to improve employee morale, reducing turnover?
 Employee productivity. Will the project reduce employee’s overtime hours, saving the company money?
 Brand perception. Is the project likely to improve the company’s brand perception and recognition, attracting more
customers or providing a competitive advantage?
You can also flip these questions to consider intangible costs. These are costs that are not quantifiable. For example,
might the project put customer retention, employee satisfaction, or brand perception at risk?

When assigning values to tangible or intangible costs and benefits, you can reference similar past projects, conduct
industry research, or consult with experts.

Calculating costs and benefits

The process of calculating costs and benefits is also called calculating return on investment, or ROI. There are many
ways to determine a project’s ROI, but the easiest way is to compare the upfront and ongoing costs to its benefits over
time.

One common ROI formula is:

In this formula, G represents the financial gains you expect from the project, and C represents the upfront and ongoing
costs of your investment in the project.

For example, imagine your project costs $6,000 up front plus $25 per month for 12 months. Twenty-five dollars for 12
months equals $300 per year, meaning your total cost is $6,300. You estimate that the project will bring in $10,000 in
revenue over the course of that year. That leaves you with:

 G = $10,000
 C = $6,300
Now, using the formula above, you plug in the amounts as follows:

 ($10,000 - $6,300) ÷ $6,300 = ROI

Then you proceed with the calculation:

 First, inside the parentheses: 10,000 - 6,300 = $3,700

 Next, $3,700 ÷ $6,300 = 0.5873
 Finally, 0.5873 = 58.7%
The ROI comes to 0.587, or 58.7%. You consider this to be a strong ROI, so you decide to pursue the project.

Key takeaway
Performing a cost-benefit analysis can help you and your stakeholders determine if it makes sense to take on a new
project by evaluating if its benefits outweigh its costs. When conducting cost-benefit analyses for your prospective
projects, you can use the guiding questions and ROI formula provided in this reading as a reference.

To learn more about performing a cost-benefit analysis, check out these articles:

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Question 1

In the initiation phase, a project manager performs research, consults with stakeholders, and clearly
documents key project components. What does going through this process help them solidify?

1 / 1 point

Project tasks

Project delivery dates

Project scope

Project closeouts

Question 2

As a project manager, you analyze the amount of time team members will need to spend on a project and the
likely ongoing project expenses. What step of the cost benefit analysis are you completing?

1 / 1 point

Cost analysis

Goals analysis

Benefit analysis

Expense analysis

Question 3

What key component in the project management cycle is a meeting scheduled with staff to train on a new
product?

1 / 1 point

Scope

Resource

Deliverable

Success Criteria

Question 4
As a project manager, you work with key stakeholders to define what needs to be completed and achieved for
a project . Which key component of project initiation does this scenario concern?

1 / 1 point

Scope

Resources

Goal

Success criteria

Question 5

As a project manager, you complete the stages in the project initiation phase. Who do you meet with to get
project approval?

1 / 1 point

The project stakeholders

The vendors working on the project

The project resources

The developing team

Question 6

Fill in the blank: A _____ is a document that defines project goals and outlines what is needed to accomplish
them.

1 / 1 point

project schedule

risk analysis

project charter

cost-benefit analysis

Question 7

As a project manager, what question will you ask to determine the customer satisfaction of a project?

0 / 1 point

Will this project reduce turnover and cause them to increase spending on the platform?

Will the project increase retention and cause them to spend more time on the product?

Is this project likely to improve employee morale based on the sales of the product?
 Is this project likely to improve the company's image and help the company succeed?

Incorrect

Please review the reading on performing a cost-benefit analysis.

Question 8

You expect that a project will bring in $22,000 USD in revenue per year. You estimate it will cost $10,000 up
front. You also estimate costs of $200 per month for the first 12 months, which equals $2,400 per year. Using
the formula (G-C) ÷ C = ROI, how would you calculate the project’s return on investment (ROI) after the first
12 months?

1 / 1 point

(15,000 - 10,000) ÷ 12,400 = 45%

(22,000 - 12,400) ÷ 22,000 = 25%

(12,400 - 10,000) ÷ 22,000 = 8%

(22,000 - 12,400) ÷ 12,400 = 77%

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