A characteristic of Agile Development is the Continuous Delivery of Value which can be measured through Net Present Value. In fact, this is expressed in the First Principle of the Agile Manifesto:-
” Our Highest Priority Is To Satisfy The Customer Through Early And Continuous Delivery Of Valuable Software”.
In order to make sure that Value is Delivered, it is necessary to Measure and monitor it. It is measured and monitored before, during and after the Project. There are lots of ways of Defining the Value of a Project. It can be defined in both monetary and non-financial ways. The different approaches to Define and Measure what matters include the Balanced Scorecard and Breakeven Analysis. Several Financial Measures are Recommended in Scrum, among which is Net Present Value (NPV). NPV is used to Estimate the true Current Value of a Sum of Money that will be Earned at some Defined Future Date.
Net Present Value & The Time Value of Money.
The Principle of NPV is that of “A Bird In The Hand Is Worth Two In The Bush”. Now say there is an Opportunity to go to an event where the tickets are on special for $100 for 6 hours. However you can not buy one, because you have actually lent that $100 to your friend. Your budget plan does not allow you to invest an extra $100 (you really are a great pal!). This is called an “Opportunity Cost”. You have missed the Opportunity because you have actually utilized your cash somewhere else.
The Net Present Value Formula.
The Formula for NPV can be revealed in different methods. Thankfully for those people who have forgotten calculus long ago, you can pick it from Microsoft Excel’s numerous formulae, without stressing excessive about how to get the correct answer.
For n at t= 0.
‘ SUM’ = Ct/ (( 1+ r) ^ t).
Ct = The Net Cash Flow For Time Period t.
r = Discount Rate.
t = Time Period.
n = Number Of Time Periods
Governa Regtech Estimates
For those of us who are unfamiliar with Greek letters, here is an example:-.
Governa Regtech Estimates that it will cost $200 000 to Develop an app for handling GDPR Regulatory Requirements which they can use to a minimum of one conventional bank. They Estimate that they can sign up one bank immediately at a monthly charge of $ 50 000. The financial director has computed a Net Present Value for the Project for the first year and given his consent.
‘ Investment Amount’ Is: $200,000.
‘ Monthly Expected Cash Inflow’ Is: $50,000.
‘ Number of Periods’ Is: 12 Months.
‘ Discount Rate’ is: 12%.
NPV = (50 000 x (1 – (1 + 1%) ^ -12)/ 1%) – 200 000.
= (50 000 x (1 – 0.8875)/ 0.01) – 200 000.
= (50 000 x 0.1125/ 0.01) – 200 000.
= (50 000 x 11.25) – 200 000.
= 562 500 – 200 000.
= 362 500.
In the above example, the Cash Inflow is the same every month, however the exact same formula can be applied where the inflow Changes. We have utilized a very high Discount Rate here, simply to make the estimation easier.
Use Net Present Value Judiciously.
While NPV does offer you a great concept of what a Future Value, or set of Values worth today. It has 2 weaknesses for long-lasting estimations:-.
- the Interest Rate is Fixed, and not Variable, while Rates Fluctuate in the real life.
- the Future Value is not constantly known, unless it is the fulfilment of a Contract or some other guaranteed earnings.
It likewise does not make much sense to use NPV for short-term computations under 12 months, as the Change over a few months is not Material.
Another element to think about that belongs to existing Market Conditions is that most nations are in a very Low Interest Rate Cycle. If you are Calculating NPV with an Interest Rate of 2%, today’s Value will not be dramatically different. It would make sense to Invest in any Project that will bring you increased profits.
Our Favourite Agile Books
We found these books great for finding out more information on Agile Scrum:
Utilizing Net Present Value in Scrum.
If your Scrum Project is expected to take 6 months or less, and the Future Value will be realised on completion of the Project, NPV is not a good Measure, and you ought to pick another procedure. If, nevertheless, the Scrum Project will take six months or more and the Future Value will take 5 years to realise, with various revenue streams each year, this is an appropriate case.
Who Uses Net Present Value?
The Product Owner is the Owner of the Product Backlog and is the Scrum Team (Scrum Master, Product Owner and Development Team) member who will use NPV according to his or her judgement and whether it is warranted to Demonstrate Value in any specific circumstance.
Case 1: to Cost Justify Scrum over Traditional Development.
NPV can form part of your argument, due to the fact that the Traditional Project will take longer, so the profits to be realised will have a deeper discount and the Present Value will be less. This can be used in combination with other costs, such as resource costs, assuming the Traditional Project requires more than the Scrum Project.
Case 2: To Prioritize Epics in the Product Backlog.
NPV is often pointed out as an alternative to Prioritize Items in the Product Backlog. It ought to just be used to Epics; User Stories are too granular and small for this strategy. You should likewise utilize a mix of other techniques such as Risk Rating (Rating Score = Probability X Impact) or ROI to get a clear view of what the Priority must be. Risk Rating is an excellent Measure, because the Principle of Scrum Prioritization is to handle the Riskiest Work first.
Case 3: To Quantify Intangible Benefits.
Where you are using Benefits Management and have Defined Intangible Benefits, such as Increased Customer Base, you can appoint approximate Values and Calculate a NPV. For Instance you could Define that each new Customer is worth $100 to the Company each year, and use that to Calculate how many brand-new Customers you need to Break Even on a campaign you are running, or what the Lifetime Value of a Customer is when Expressed as a Present Value.
The appropriate times where you would utilize NPV in a Scrum would be:-.
- at Project start, to produce a Baseline for whatever needs to be Measured and Assigned a Value.
- throughout Sprint Planning to assist with Prioritizing Epics.
- throughout the Project as an Aid to Prioritizing the Product Backlog.
- As input to the Sprint Review.
You can also select not to use NPV and use several various Valuation Methods to identify Project Value; all of it depends on what your Stakeholders understand and prefer. The Product Owner can make these decisions, as he is accountable for the Estimations and Demonstrations of Value.
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