Question

Explain why discounted cash flow techniques provide better criteria for project selection then net profit or return on investment.Also discuss the need of Cost Benefit Analysis in Software Development with proper diagram and explanation

.What is the difference between Cost benefit Analysis and Earned Value Analysis with proper easy explanation and diagrams in Software project management Subject.

Answer 1

Question: Explain why discounted cash flow techniques provide better criteria for project selection then net profit or return on investment.

Answer: Discounted cash flow method- It is a method of evaluating the project. This method estimates the future free cash flow and discount them by using the current discounted or annual rate. If the calculated value is higher than the initial investment or current cost of investment, the opportunity is good and project should be approved.

Discounted cash flow method vs return on investment- Discounted cash flow method provides the actual cash flows that are discounted with the current annual rate, this method uses the "Time value of money concept". Time value of money concept helps in calculating the present worth of the future cash flows as we know that money that is received today worth more than the money that is received in future.

Cost Benefit Analysis in Software Development- Cost benefit analysis provides the insight about the cost incurred and benefits reaped from a project. Cost benefit analysis makes it easier to know the profit from a project. In software development, cost benefit analysis is very important. Developing a Software needs several steps and it requires higher cost too. Software development is a very crucial decision, sometimes it may fail and money gets wasted so Before developing a software, cost-benefit analysis should be done so that it can be know whether the project is feasible or not, whether it will be profitable or not. If the project looks profitable then only steps should be taken to develop it.

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