Capital Charge

The internal charge for the use of capital is based on the company's weighted average cost of capital (WACC). Project managers do not influence this over the short term. Over the long term, however, they can lower this by managing good projects with successful outcomes. The capital charge is influenced by the use of capital by the project venture and the WACC for the company. The use of capital by the project venture is a combination of the use of capital by the project and the use of capital by the project outcome life cycle. At this point, we can see the influence of the three project variables on this part of the business system. Project cost and project duration are a direct influence on the project's use of capital. The longer and the more expensive the project is, the higher the capital charge is. Outcome, in turn, influences the capital charge of the project outcome life cycle. Here, consideration of time to breakeven and the use of working capital become important. These financial results

FIGURE lo* 1-1 Business Systems Diagram

Project Contribution to Business Results

Project Contribution to Business Strategy

Project Cost

Strategic Alignment

Project Duration

Project Management . Practices „

Project Contribution to Economic Value (EVA)

Project Outcome

Cash Flow From Project Enterprise

Revenue

Project Cost

Expenses

Depreciation

Operating Expenses

Price

Market Share Volume

Project Outcome

Project Duration i

Project Management Practices

Project Outcome

Capital

Capital Charge

Project Use of Capital

POL Use of Outcome

Project Cost

Project Duration

Project Outcome

Project Management Practices

WACC

Lender's Expectations

Investor's Expectations can be influenced by decisions made during the project, so the project manager and team members should understand the business implications of their decisions. For example, the decision to add a new feature may increase the project duration, which will result in an increase in the capital charge.

Was this article helpful?

0 0
Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook


Post a comment