Often, project managers I mentor appear to have nagging queries on project initiation, prioritization and ROI. Here is my attempt to demystify, in the simplest possible way, most common terms:

1) Return on Investment (ROI)

2) Net Present Value (NPV)

3) Payback period

4) Internal rate of return (IRR)

First things first, why do we even need to understand these terms?

Any company would have a multitude (or may be tens?)of projects at any given point in time and would want to prioritize or decide which one or ones to put their money into assuming that they either do not have enough money or would not want to spend all their money.

Okay, so how what are these terms and how do they help companies in deciding which project or projects to choose or ignore?

Return on Investment commonly referred to as ROI tells the company what it gets in $ value against what it spent (or rather will spend) on the project.

Net Present Value abbreviated NPV is the value of future return in today’s value. Time is money you see.

Payback period as simple as it sounds tells how long it will take before the value is realized

Internal rate of return (IRR) will let the company evaluate options – compare two projects and decide which one is better (like comparing interest rates offered by two banks and deciding which one to go with)

In the next post, I will get into more details and explain how each of this is calculated, with an example of course !