Definition: Measures whether a project adds value beyond its cost of capital.
✅ Use for: Project selection
🚫 Don’t confuse with:
EVA helps determine if a project generates returns above the required rate of return, making it a critical metric for financial decision-making.
Definition: The value of the next best alternative not chosen.
🧠 Think About It:
Opportunity cost emphasizes the trade-offs in decision-making, ensuring you consider what you’re giving up when choosing one project over another.
Definition: Money already spent that should not impact future decisions.
🧠 Think About It:
Sunk costs are irrelevant to future decisions because they cannot be recovered, helping avoid the trap of “throwing good money after bad.”
Definition: After a point, adding more input = smaller gains.
👩💻 Example:
This law highlights the inefficiency of over-allocating resources, as additional inputs yield progressively smaller outputs.
Definition:
👉 Current Assets – Current Liabilities
📊 = What the company has on hand to invest in new projects.
💡 Think of it as project fuel. ⛽
Working capital represents the liquid resources available for day-to-day operations and new project investments, critical for financial health.
Definition: Large assets lose value over time.
No calculations needed! Just know the types:
Depreciation spreads the cost of an asset over its useful life, impacting financial statements and tax calculations.
Projects should align with strategic goals and follow a selection process:
✅ A solid Business Case includes:
📄 Leads to the Project Charter, which starts formal project work!
🔎 On the Exam:
A business case justifies the project by aligning it with organizational goals and providing a clear rationale for investment.
| Concept | Key Idea |
|---|---|
| EVA | Value added beyond cost of capital |
| Opportunity Cost | Value of the best alternative not chosen |
| Sunk Costs | Past costs – ignore in current decisions |
| Law of Diminishing Returns | More input = less efficient output after a point |
| Working Capital | Assets – Liabilities (available money) |
| Depreciation | Asset value loss (straight-line or accelerated) |
| Business Case | Describes why the project matters and its expected benefits |