project management

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Project Management

Project Management

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Projects Introduction

A project is a series of activities

and tasks with a specifiedobjective, starting and

endingdates and resources.

Project ManagementProjects Introduction

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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.


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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


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Generic Project Life Cycle

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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)

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1.1 Technical Analysis

Location & site Plant size Technology Construction process Inputs required Manpower Environment Impact assessment (EIA)

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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

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3.Production / Implementation

Putting words / plans in action

4. Termination Declare - End of the project

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5. Evaluation

Control process – Measure actual performance Compare with expected/targeted Find Difference Reasons for difference Alternative to correct difference

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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

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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 ($) of all benefits anticipatedSum ($) of all costs anticipated

Project Management1. Project Justification & Prioritization

A. Benefit-Cost Analysis

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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 1through 5. The initial cash outlay will be $40,000.


A. Benefit-Cost Analysis 1. Benefit-Cost Analysis

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ABC HospitalBalance Sheet

December 31, 2001(in million of dollars)

Assets Liabilities

Current assets… $ 20,000Fixed assets….… $ 20,000

Current liabilities..$10,000Long term debt….$05,000Owner's Equity…..$25,000

Total……….…….. $ 40,000 Total…………………$40,000


A. Benefit-Cost Analysis 1. Return on Assets

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ABC HospitalIncome StatementDecember 31, 2001

(in millions of dollars)

Net Sales $ 150,000Cost of Goods Sold $ 082,000Gross Profit $ 068,000Operating Expenses $ 049,000Earning Before Interest & Taxes $ 019,000Provision of Interest and Taxes $ 011,000Net Income $ 008,000



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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%



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Return on Investment

The average annual net income from an investment expressed as a percentage of theaverage amount invested.

ROI = Net IncomeInvestment

For ABC Hospital’s Project ROI= 08,000 = 0. 25 40,000

ABC management has set ROI @ 35%


A. Benefit-Cost Analysis 2. Return on Investment

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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.


A. Benefit-Cost Analysis 3. Net Present Value (NPV)

t

n

t=0

CF t

( 1 + r )

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CF nNPV = CF CF21

+++ -(1+k) (1+k) (1+k)1 2 n

ICO

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

54321

13%,1

13%,513%,4

13%,3 13%,2

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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.

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Internal Rate of Return


A. Benefit-Cost Analysis 4. 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

ICO = CF

2 +(1+IRR) (1+IRR) (1+IRR)

1CF

++1 2 n

n

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$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%, 1

10%, 4

10%,3 10%, 2

10%, 5

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.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 %

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The management of ABC Hospital hasdetermined that the hurdle rate for thisproject is 13%.

Should this project be accepted?

No! The Hospital will receive 11.57 % foreach dollar invested in this project at a

cost of 13%. (IRR < Hurdle Rate)



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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.


A. Benefit-Cost Analysis 5. Payback Period

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40K

10K 10K 10K

1 2 4

10K 20K 30K 40KCumulative Inflows

10K

3

PBP = a / b = 40 /10

= 4 years

(a)

(b)



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PBP = a + (b - c) / d= 3 + (40 – 37) / 10= 3.3 years

40K

10K 12K 15K 10K 7K

1 2 3 4 5

10K 22K 37K 47K 54KCumulative Inflows

(a)

(b)

(c)

(d)

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Evaluation Summary


A. Benefit-Cost Analysis 6. Evaluation Summary

Method Result Criteria Decision

ROA 0.48 60% Reject

ROI 0.25 35% Reject

NPV -$1,428 Positive Reject

IRR 11.57% 13% Reject

PBP 3.3 years 3.5 years Accept

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DPR All this put into report called as

DPR

project management

Documents

new project

process of project planning

benefitcost analysisreturn

cost ratio

cost constraints

best optionstechnical

assets roareturn

prioritization of projects