Risk-based Project Value – The Definition and Applications to Decision Making

Decision making is a core function of the project management required in planning and execution phases. Decisions shall be made on two or more alternatives, such as ‘go or no-go’, based on forecasted values of the project status. Conventional project evaluation techniques like DCF method have, however, provided only static evaluation metrics applicable in planning phase.In this paper, a metrics called ‘risk-based project value’ (RPV) is presented as the dynamic evaluation of projects. RPV is defined as a summation of realized cash flows and expected cash flows which are discounted by risk probabilities in the future. It can be calculated based on expenses, incomes and the risk probabilities associated with project activities with any given activity network diagram. RPV normally increases as the project progresses toward the goal. Because of this nature, RPV of an entire project can be broken down to each activity's contributed value (CV). The CV of an activity is defined as the increase of RPV after its successful completion.Analysis with the theoretical framework of RPV and CV provides various application areas of decision such as: (1) go or no-go decision, (2) analysis of risk probability on a project value, (3) risk-based progress control, and (4) budget optimization.