Project Planning and Control

Engineering Project ManagementLecture 3Riphah International University1Project AppraisalThe fundamental question is to whether if the Business Case/Project Feasibility is convincing to invest in a project?

The details of the Project Feasibility must indicate how the proposed investment might contribute to the overall objectives of the organisation and to do this, it must establish the predicted costs and benefits for the whole life of the project

There must be a formal and transparent process for selecting from a number of competing investment opportunities 2Why Project AppraisalA number of investment opportunities (in the form of potential project) may exist and these must be examined and compared in terms of the deliverables and viability SELECTION

Project Managers are responsible for making the most effective use of finite RESOURCES and this will often necessitate deciding where to allocate resources, when to allocate resources and how much resource to allocate.

3This fact emphasises the need to minimise the RISKS associated with decisions made, through the use of a structured investment appraisal process.

To establish that the Business Opportunity is:ProfitableReliableAchievable/Do-ableSustainableNeeded (Defines a relevant solution to a business problem or justifies its role as a key opportunity, aligned with organizational objectives)

Process of Analysis/AppraisalProject Initiation PhaseProject Planning PhaseObjectives of Project Appraisal/FeasibilityThe Key Objectives of Project Feasibility are:To ensure you are not embarking on a Titanic The Risks and Returns should coincideTo ensure that you are not missing your train- To establish successfully that the project is the need of the time and exceeds the opportunity costs of doing or not doing anything else, in a sensible manner.

6Project Environments Macro Spheres/General Environment

Competitive/Meso Environment

Internal/Micro Environment

7Tools and Techniques for AppraisalFor Micro level/Internal environmental analysis, tools like SWOT and TOWS analysis are used.

For Competitive Environment analysis, tools like BCG Matrix, Porters 5 Forces Model, McKinsey 7s Model are used.

For Macro level/General Environment, tools like PEST, PESTLE and STEEPLE are used. SWOT Analysis

PEST Analysis

PESTLE Analysis

Porters 5 Forces ModelPower of Customers/BuyersPotential/Threats of newentrantsPower of suppliersPotential/Threats of substitutesIntensity of rivalryBCG MatrixDogs: Projects with a low share of a low growth. Do not generate cash for the company

Cash Cows: Projects with a high share of a slow growth market. Generate more than is invested in them.

Question Marks: These are projects with a low share of high growth market. They consume resources and generate little in return

Stars: Projects that are in high growth markets with a relatively high share of that market. Stars tend to generate high amounts of income

McKinseys 7-S Model

Structure: e.g., Functional, Project, Matrix, Network, JV, Holding, Centralised, Decentralised

Systems: Procedures, Processes, e.g., financial systems, Information systems

Style: Cultural, e.g., management style, workingpattern

Staff: Numbers/Types of personnel within the organisation

Skills: Distinctive capabilities of personnel and organisation, e.g., Core competencies

Strategy: Allocation of the organisations resources over time, environment, competition, customers

Shared Values: Central belief and attitudes, aspirations, common aim

Parts of Feasibility StudyA Project Feasibility must define a BUSINESS PROBLEM or OPPORTUNITYMust suggest a SOLUTION, addressing parts like:Justification of the Project (Technical/commercial and or Procedural Feasibility)Project Objectives, Scope, Deliverables and MilestonesIts cost and benefit analysis (Monetary and non monetary costs)Resource Requirements (Human, Technical, Economic, Assets)Legal Requirements (Contracts and Approvals etc.)Timeline of implementationMethod of implementation (Project implementation plan) Project Constraints, Limitations and Risks

Process of Analysis/AppraisalProject Initiation PhaseProject Planning PhaseScope of The project Using XML in Excel

Defining Scope PMBoK (2008) defines project scope as: "Project scope is the work that must be done to deliver a product with the specified features and functions"

Using XML in ExcelScope Statement What the project must deliver and sets the parameters of the project

Describes the requirements which the product or service has to perform

Basis for all future decisions and plans

Clarifies Objectives and deliverables: the project must deliver to be successful

Using XML in Excel

Scope statement Buying a car, what would the scope look like?

Having defined the scope, cost and time can be calculated

Using XML in ExcelUsing XML in ExcelWhat the client asked for

What the client got.

Scope Management It is the rigorous monitoring and control of the work necessary to complete the project

It defines what work is required and ensures that the project only includes that work.Involves managing both product scope and project scope.

Using XML in ExcelScope Management Process Using XML in ExcelScope Creep PMI defines scope creep as adding features and functionality (project scope) without addressing the effects on time, costs, and resources, with or without customer approval.

Using XML in ExcelScope Creep ..Scope creep accumulates so slowly and subtly that you don't realize it's happening until it's too late, like when you've already promised it or, worse, when you're already building it.

Scope creep is like slowly loading up your plate with little portions of everything on the buffet until you realize man, this plate is getting heavy and I can't eat all of this, what was I thinking!

Using XML in Excel

How is Scope Creep Introduced Poor Requirements AnalysisNot Involving the Users Early EnoughUnderestimating the Complexity of the ProjectLack of Change ControlNot giving sufficient time for requirement definition.Change in business or technical landscape.Aiming to please the customer (beyond what has been paid for)

Using XML in Excel27Can Scope Creep be Good?When its producing what the client actually wantsWhen you can take advantage of new technologyWhen it takes advantage of an opportunity scope change can be advantageous it might depend on your contract

Using XML in Excel28Objectives The project objective is a clear statement describing what the project is trying to achieve. A well-worded objective will be Specific, Measurable, Achievable, Realistic and Time-bound (SMART).

Using XML in ExcelObjectives Vs Deliverables Project objectives: These objectives describe the purpose of the project and what the project will achieve from a business perspective. Generally, the project is considered to be successful if the project objectives are met successfully.

Project deliverables. Deliverables describe the tangible products that are being built by the project. All projects produce deliverablesUsing XML in ExcelWhen you have completed creating your objectives and deliverables, go back and make sure that theyre all in alignment.

Using XML in ExcelProject Appraisal ScenariosWILL THE PROJECT MAKE A PROFITSCALE CAN WE AFFORD THIS?HOW SOON WILL I SEE A RETURN?COULD WE MAKE BETTER MONEY ELSEWHEREDO WE NEED ADDITIONAL RESOURCE?WHAT ARE THE KEY MILESTONES AND DECISION POINTSHOW LONG IS THIS PROJECT?WHAT ARE THE RISKS OF DOING (OR NOT DOING)?

Capital Investment AppraisalIt is a formal Process of evaluation in order to aide/facilitate decision making process

It includes a cost benefit analysis and takes into account all the relevant factors such as:Capital Costs, Operating Costs and Fixed CostsSupport and Maintenance CostsDisposal CostsExpected gains (monetary and non monetary)

It compares different projects by using tools like:ROIIRRPay Back PeriodNPVReturn on InvestmentReturn on investment (ROI)

The simplest way to ascertain whether the investment in a project is viable is to calculate the return on investment (ROI).

Return on investment % = Expected return 100Investment

This calculation does not, however, take into account the cash flow of theinvestment which in a real situation may vary year by year.Payback PeriodPayback is the period of time it takes to recover the capital outlay of the project, having taken into account all the operating and overhead costs during this period.

Usually this is based on the undiscounted cash flow so does not take into account the time value of money

Payback is particularly important when the capital must be recouped as quickly as possible as would be the case in short-term projectsPay Back Period = Investment/average per year return

e.g. a project investment is Rs 100 and average return is Rs 10 per year, so payback period would be = 100/10 = 10 yearsNet Present ValueIt measures the actual cash flow to obtain a realistic measure of the profitability of the investment with respect to time value of moneyCan be calculated forward and backwards as wellForward Analysis of NPVFind the Future Value (FV) of investment compared with time value of moneyBackward AnalysisFind the Present value (PV) of the future returns to todays valueNet Present ValueExample Forward analysis

Project Investment = Rs 100Project Return after 3 years = Rs 115Future value of Rs 100 if kept at bank at interest rate of 5%/annum = Present Value (1+r)n Where n = number of yearsr= % return/100 = 100 (1+0.05)3 = Rs115.76So if the Bank pays more than the Project returns, the Project is not feasible

Backward Analysis = Future Value x 1/(1+r)n= 115 x 1/(1+ 0.15)3 = Rs 97.75So, if the Project does not meet or exceed its present value of the Money, it is not feasible

Internal Rate of ReturnInternal rate of return is the discount rate that makes the NPV of the project = 0IRR tells us how high the discount rate would need to be before a project is unacceptableIRR = (FV/PV)1/n 1 = (121/100)1/2 -1 = (1.21)0.5 -1= 1.1 -1 = 0.1 or 10%NPV vs IRRNPV directly measures the increase in value to the firm

Whenever there is a conflict between NPV and another decision rule, you shouldalwaysuse NPV

IRR is unreliable in the following situationsNon-conventional cash flowsMutually exclusive projects

N.B: Mutually exclusive projects are projects amongst which only one can be selected. E.g. Replacing a machine or repairing it are two mutually exclusive projects, you may choose only one at a time and disqualify otherNPV vs IRRe.g. If the Required Rate of Return is 10%For project A, the investment is Rs 100For B, it is Rs130The cash flows are given here as

Definitely, here the Project B is more feasible and IRR compliments NPVYearProject AProject B0-100-1301709025070NPV99.17132.23IRR9.54%10.94 %NPV Vs IRRSee another Example

Notice the difference in IRR and NPVYearProject AProject B0-100-2501105130249254NPV (@10%)128.92317.35IRR24.9 %23.9 %Capital Investment Process

Capital RationingIn this situation, the decision maker is faced with a limited capital budget. As a result, it may not be possible to take all positive net present value projects. Under this scenario, the problem is to find that combination of projects (within the capital budgeting constraint) that leads to the highest Net Present Value. The problem here is that the number of possibilities become very large with a relatively small number of projects. Thus, in order to make the problem "manageable", we can systematize the search.

Capital RationingWe would want to choose that set of projects within the capital budgeting constraint that gives the highest: Net Present Value INVESTMENT This ratio is called the profitability Index

Capital RationingSuppose we have a Capital Budget of Rs 100 and 5 viable optionsProjectInvestmentNPVA4550B1516C8082D510E2024What will be your right mix ?Qualitative Aspects of Project AppraisalA Qualitative Assessment must also be performed to consider the non-financial elements. This may Include areas such as:

Strategic Fit Risk Assessment Competitive Position Technical/Operational/Marketing drivers Track record Contribution to current or future activities HSE/Legal/HR/Commercial issues or challenges Management of change considerations etc.,

Facilitation of Capital Investment

By the use of capital investment appraisal techniques, more clarity is gained to make an informed decisionQualitative inputs should not be ignoredCost + Risk > Benefits = RejectBenefits > Cost + Risks = ApproveLimitations of Capital BudgetingDiscount Rate:Organizations sometimes seriously lack the understanding that the Discount Rate is:Minimum Return required (Adjusted for Time Value) + Adjustment For Risk

An Organization might classify projects as A, B or C with C being the riskiest project. Project classified A might have nothing added to the discount rate while B projects would have a certain amount added with an even larger amount added for the C projects. Companies generally assume they are actually earning the discount rate if they achieve a NPV of Zero or greater.

These limitations can be used to manipulate the results of an otherwise unfavorable project and make it appear to have a larger return than it actually has. Therefore, a Project Manager should:Evaluate the cash outflows after the payback data and how long does it take to recoup those cash flows?See how will cash inflows be reinvested throughout the life of the project and will those reinvestments earn the same or greater amount than the discount rate on the project?