Project Management

1. Project Management Project Management

2. Project Management Projects Introduction Projects Introduction A project is a series of activities and tasks with a specified objective, starting and ending dates and resources.

3. Project Management Projects Introduction Projects Introduction Project management is the process of project Planning and implementation to achieve: • The specified goals and objectives, • At the desired performance or technology level, • Within the time and cost constraints, • While utilizing the allocated resources.

4. Project Management Projects Introduction Elements of Project Management: • Planning: Deciding what to do • Scheduling: Deciding when to do it • Implementing: Putting words into action • Controlling: Assuring that the desired results are obtained

5. Generic Project Life Cycle

6. Project Life Cycle • 1. Feasibility • Identify the need • Alternatives to satisfy that identified need • Screening – selecting few best options • Technical Analysis (next slide) • Economic and Financial analysis – Best one: feasible for investment or not (later slides)

7. 1.1 Technical Analysis • Location & site • Plant size • Technology • Construction process • Inputs required • Manpower • Environment Impact assessment (EIA)

8. 2. Design & Planning • Design • Preparation of blue print – what are the activities are required • Output of design phase is Detailed project report (DPR) • Planning • When, what and who to do

9. 3.Production / Implementation • Putting words / plans in action 4. Termination • Declare - End of the project

10. 5. Evaluation • Control process – • Measure actual performance • Compare with expected/targeted • Find Difference • Reasons for difference • Alternative to correct difference

11. 1.2 Economic & Financial Analysis • Market & Demand analysis – Short, Medium & Long term Justification and prioritization of projects is based upon the following methods: • Benefit-Cost Analysis • Return on assets (ROA) • Return on investment (ROI) • Net present value (NPV) • Internal rate of return (IRR) • Payback period

12. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis Benefit-Cost Analysis • An estimate based on the project’s benefits and costs and the timings • Uses project’s projected revenues, costs and net cash flows • For approval of funds from top management • To maximize returns and minimize risk • Benefits-to-cost ratio: Sum ($) of all benefits anticipated Sum ($) of all costs anticipated

13. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 1. Benefit-Cost Analysis ABC Hospital’s Radiology Equipment Project Dr. XYZ is evaluating a new project for his ABC Hospital’s Radiology Equipment Project. He has determined that the after-tax cash flows for the project will be $10,000, $12,000, $15,000 and $7,000 respectively for each of the years 1 through 5. The initial cash outlay will be $40,000.

14. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 1. Return on Assets ABC Hospital’s Radiology Equipment Project

15. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 1. Return on Assets ABC Hospital’s Radiology Equipment Project

16. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 2. Return on Assets Return on Assets A measure of the efficiency with which management utilizes the assets of a project. ROA = Operating Income Total Assets For ABC Hospital’s Project ROA= 19,000 = 0.48 40,000 ABC management has set ROA @ 60%

17. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 2. Return on Investment Return on Investment The average annual net income from an investment expressed as a percentage of the average amount invested. ROI = Net Income Investment For ABC Hospital’s Project ROI= 08,000 = 0. 25 40,000 ABC management has set ROI @ 35%

18. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 3. Net Present Value (NPV) Net Present Value (NPV) The net present value for a project is defined as the difference between the present value of the project’s future cash flows and its initial investment. NPV = ∑ n=number of periods, t=time period, r=per period cost of capital for the project, and CFt is the cash flow in the time period t. CF n t t ( 1 + r ) t=0

19. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 3. Net Present Value (NPV) Net Present Value (NPV) NPV = $10,000 + $12,000 + $15,000 + $10,000 + $7,000 (1.13) (1.13) (1.13) (1.13) (1.13) =$10,000(PVIF )+$12,000(PVIF )+$15,000(PVIF ) + $10,000(PVIF )+ $7,000 (PVIF ) - $40,000 CF CF CF 1 2 n ICO NPV = + + + - 1 2 n (1+k) (1+k) (1+k) 1 2 3 4 5 13%,1 13%,2 13%,3 13%,4 13%,5

20. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 3. Net Present Value (NPV) Net Present Value (NPV) NPV= $10,000(.885)+$12,000(.783)+$15,000(.693)+ $10,000(.613)+$7,000(.543)-$40,000 NPV= $8,850+$9,396+$10,395+$6,130+$3,801- $40,000 NPV= -$1,428 As NPV is negative, ABC Hospital will reject the proposal.

21. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 4. Internal Rate of Return Internal Rate of Return The Internal Rate of Return (IRR) is that discount rate (r) that equates the present value of net cash flows to The initial investment: CF CF CF 1 2 n ICO = + + + n 1 2 (1+IRR) (1+IRR) (1+IRR)

22. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 4. Internal Rate of Return Internal Rate of Return $40,000 = $10,000(PVIF )+$12,000(PVIF )+$15,000(PVIF )+ $10,000(PVIF )+$7,000(PVIF ) = $10,000(.909)+$12,000(.826)+$15,000(.751)+$10,000(.683) +$7,000(.621) =$9,090+$9,912+$11,265+$6,830+$4,347 =$41,444 (Rate is too low) At 15% it comes out to be = $36,841 (Rate is too high) 10%,3 10%, 1 10%, 2 10%, 4 10%, 5

23. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 4. Internal Rate of Return Internal Rate of Return .10 $41,444 X $1,444 .05 IRR $40,000 $4,603 .15 $36,841 X = $1,444 .05 $4,603 X = 0.157 IRR= .10+.0157= .1157 or 11.57 %

24. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 4. Internal Rate of Return Internal Rate of Return The management of ABC Hospital has determined that the hurdle rate for this project is 13%. Should this project be accepted? No! The Hospital will receive 11.57 % for each dollar invested in this project at a cost of 13%. (IRR < Hurdle Rate)

25. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 5. Payback Period Payback Period (PBP) It is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow.

26. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 5. Payback Period Payback Period (PBP) 1 2 3 4 (b) 10K 10K 10K 10K 10K 20K 30K 40K Cumulative Inflows 40K (a) PBP = a / b = 40 /10 = 4 years

27. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 5. Payback Period Payback Period (PBP) (a) 1 2 3 4 5 PBP = a + (b - c) / d = 3 + (40 – 37) / 10 = 3.3 years 12K 15K 7K 10K 10K (d) 10K 22K 37K 47K 54K Cumulative Inflows (c) 40K (b)

28. Project Management • Project Justification & Prioritization • A. Benefit-Cost Analysis • 6. Evaluation Summary Evaluation Summary

29. DPR • All this put into report called as DPR