project management - anant dhuri.pdf
TRANSCRIPT
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PROJECT MANAGEMENT100 Marks
Course content:
1. INTRODUCTION:Concept of Project Management. Scope & Coverage. Project Function in an organization Layout of Project
Department. Role of Consultants in Project Management.
2. PROJECT IDENTIFICATION:Selection of product identification of market preparation of feasibility study/report Project formulation -Evaluation ofrisks preparation of Project report.
3. SELECTION OF LOCATION & SITE OF THE PROJECT:Factors affecting location policies of Central State Government towards location Legal aspects of projectmanagement.
4. FINANCIAL ANALYSIS:Profitability Analysis Social cost Benefit Analysis preparation of Budget and Cash Flows.4a) Materials Management in Project Planning Procurement storage disposal.
5. FINANCING OF THE PROJECT:
Source of Finance Cost implications thereof Financial Institutions Guidelines for funding projects, Risk Analysis Sensitivity Analysis.
6. QUANTITATIVE ASPECTS OF PROJECTS:PERT/CPM Network Analysis for monitoring of the project Other quantitative techniques for monitoring and Controlof project
7. COMPUTER APPLICATIONS:Selection of software packages for application to Project management.
Reference Text
PMP - Project Management Professional - Study Guide - By Kimi Heldman Project Management - By S. Choudhary
Text Book of Project Management - By P Gopalakrishnan, V. E. Ramamoorthy Project Management - ByPrasanna Chandra
Project Appraisal - By P. K. Mattoo Project Management - By Vasant Desai
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1. INTRODUCTION
Concept of Project Management. Scope & Coverage. Project Function in an organization Layout of Project Department. Role of Consultants in Project Management.
I. FUNDAMENTALS OF PROJECT MANAGEMENT
What is a project?
1. A specific, finite task to be accomplished
2. Can be of a long or short term duration
3. Can be large or small task
Project Definition
A project is a temporary endeavor undertaken to create a unique product or service.
Successful Project
Meets or exceeds the customers requirements
Is delivered on time Within Budget
Projects Vary in Size and Scope
NASA shuttle launch
Building a boat
Building a hospital
Building renovation and & space modification
Planning a party or wedding
Organizing the Olympic games
Developing a new software program
Getting a university degree
Company mergers
Project Characteristics
Constant communication across organizational
boundaries
Many people involved, across several functional
areas
Sequenced events
Goal oriented
Has an end product or service
Multiple priorities
Complex and numerous activities Unique, one-time set of events
Deadlines
Start and end dates
Identifiable stakeholders
Limited resources and budget
When is a Project a Project?
A task or set of work assignments may be done by one or more persons using a simple to do list A task become a
project when the characteristics of a project begin to dominate and overwhelm individuals.
Unable to meet deadlines, budgets and corporate expectations.
Project Management
Project management is a method and/or set of techniques based on the accepted principles of management used for
planning, estimating and controlling work activities to reach a desired result on time, within budget, and according to the
project specifications. Projects and project management are about people and teamwork and involves planning:
- Who does what?
- Who takes what risk?
- Who else is involved or interested/affected?
Its the application of knowledge, skills, tools, and techniques to project activities to deliver a successful project.
Tools/techniques
Processes and methodology
More than time, cost and scope
Hard and soft skills
A discipline evolving towards a profession
Business and Social Aspects of Project Management
Hard and soft skills
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Technical aspects of project management
Interpersonal skills
Influence
Politicking
Negotiation
4 Project Stages
1. Start Up2. Planning
3. Execution
4. Close Down
Project Management Challenges
Lack of a common understanding on the question What is project management???
Managing stakeholders, expectations, teams, projects, uncertainty
Measuring project management results
Methodology issues
Value of Project Management (Why are we doing this?)
Improve project / program / firm performance as measured by efficiency, effectiveness Competitive advantage through competency
Be more Successful
Proactive vs. reactive
Root out ill-conceived, directionless projects
Increase visibility by providing roadmaps
Project Management Team
Project Sponsor(s)- Decision maker, funder, champion
Project Manager- Manages the big picture
Project Leads- Manage parts of a project
Project Team- Work on specific tasks
Stakeholders - Vested interests. Many of them. Keep them happy
Major Causes of Project Failure
Projects fail for the following reasons:
The project is a solution in search of a problem
Only the project team is interested in the result
No one is in charge
There is no project structure
The plan lacks detail
The project has insufficient budget and/or
resources
Lack of team communication
Straying from original goal The project is not tracked against the plan
Major Causes of Project Success
Stakeholders are identified
Stakeholders expectations are known and met
Senior Management support
There is a clearly stated purpose and a sound plan
Goal and objectives are understood and
communicated
A constructive goal-oriented culture
Technically competent team
Effective (and committed) team
Excellent communication Trust
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Project to Development Relationship Model
Project Management Vs. Methodology
Methodologies give you templates of things to do. Project management applies them to this project.
Roles of a Project Manager
1. Coordinator
2. Communicator
3. Leader
4. Negotiator
5. Planner
6 Phases of a Project
1. Enthusiasm
2. Disillusionment3. Panic
4. Search for the Guilty
5. Punishment of the Innocent
6. Praise and Honors for the Non-Participants
Characteristics of Effective Project Management
Effectively plan the project
Accurately monitor and communicate the project progress
Ensure that all requirements are met
Ensure the project is on time and within budget
Schedule resources effectively
Manage changes to the project
II. TECHNICAL ASPECTS OF PROJECT MANAGEMENT
Project Management Knowledge Areas
A project manager juggles 9 + balls (knowledge areas) and many tools and techniques
Scope
Time
Cost
Human Resources
Communication
Procurement
Quality
Risk Management
Integration
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Project Management Functions
1. Integration Management
2. Scope Management
3. Risk Management
4. Communications Management
5. Schedule Management
6. Human Resource Management
7. Quality Management
8. Cost Management
9. Procurement Management
1) INTEGRATION MANAGEMENT1. Pulling all the knowledge areas together
2. As you go through the various project phases, consider the links between knowledge areas
Plan the plan
Execute the plan
- Project deliverables and project management outputs
3. Control the plan
2) SCOPE MANAGEMENT
Ensure that the project includes all the work required, and only the work required, to complete the project successfully.
1. Initiate the project
Feasibility, market, customer or business need
Environmental analysis, business case
Project selection practices and management decision practices
Project link to the firms strategy or corporate goals
Initiate the project
Identify the project manager
Develop a charter
- Formally recognize the existence of the project
- Include the business need and product description, constraints and assumptions
- Approval to proceed
Funding, authority, sponsor
2. Plan and define the scope in detail
Conduct a cost/benefit analysis, consider alternatives, get expert opinion and review historical databases,
brainstorm
What is in scope? What is out of scope? What are the criteria for completing phases?
Develop a work breakdown structure (WBS)
Create a scope statement with assumptions and constraints
- Project justification, product description, deliverables, success criteria, scope management plan
- Use for future project decisions
3. Verify the scope
What is the process and criteria for accepting the scope of work delivered?
Work results and documents
Inspection
Acceptance form
4. Control the scope
Performance reports, change requests, issues management form, scope management plan, corrective action,
lessons learned
Scope tips
1. Be inclusive involve stakeholders
Work on securing and maintaining their commitment to the project
Commitment: funding, approvals
2. Spend more time planning the projectthen follow it (with updates of course)
3. Define project success and communicate it
4. Steering committee with authority and decision making power Supportive and decisive sponsor
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Change control
Insure that changes are agreed upon. Determine when scope change is desired/has occurred. Managing the change
through all other processes (schedule, cost, quality).
3) RISK MANAGEMENT
The process of identifying, analyzing and responding to project risk. Risk is an uncertain event or condition that will have
an effect on the project. It has a cause and an effect and a consequence to cost, schedule, or quality.
1. Identify risks
- What could go wrong (harm, loss, opportunities and threats) Consider ALL knowledge areas
- Internal and external risks
- Sources of risk: product technology, people (misunderstandings, skills), project management etc.
2. Quantify risks
- Risk interactions, risk tolerance
- High, Medium, Low (HML) - qualitative
- Expected Monetary Value (EMV) quantitative
3. Develop risk response plan
Opportunities and threats to respond to and opportunities and threats to accept
- Avoid eliminate cause
- Mitigate reduce risk occurrence
- Accept contingency plans, accept losses
Its OK to do any of these
Insurance, contingency plans, procurement, alternative strategies, contracts
Risk management template
4. Control risk responses
Workarounds (defined as when it hits the fan unexpectedly and you need to deal with it then and there)
Ongoing process of risk management
- Corrective action
- Update risk management plan
Risk Management Tips
- Start Risk Management at the beginning of the project- Review risks throughout the project (e.g. weekly, monthly)
- Update and project schedules, budget, staffing etc. as risk management plans are changed
Risk quantification techniques
1. High, Medium, Low (HML)
- Probability of occurrence and impact
- High, Medium, Low grid
- Focus on HHs and less on LLs
- Keep it simple
2. Expected Monetary Value (EMV)
- EMV=risk event probability X risk event value
- 25% chance of rain X $1,000 impact of damage to convertible car interior = EMV of $250- 75% chance of rain X $1,000 impact of damage to convertible car interior = EMV of $750
4) COMMUNICATIONS MANAGEMENT
Ensure the timely and appropriate generation, collection, dissemination, storage, and ultimate disposition of project
information. Who needs to know what? When do they need to know it? How will it be communicated and by whom?
1. Develop the project communication plan
- Stakeholder analysis
- Information to be shared (to who, what, how, when, why)
- Technology
2. Distribute information
- Project databases, filing system, software / hardware
- Report up, down and across the firm3. Report performance
- Project plan, work results
- Project performance reports
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- Variance reports, trend analysis, change requests
- Report the Good, Bad & Ugly
4. Administrative closure
- Knowledge management
- Archives
- Acceptance forms
- Lessons learned
Sample communication formats
Status reports
Team meetings
Project files
PR initiatives
Newsletters
E-mail
Databases
Website
RACI
Posters
Coffee room chats
Milestone celebrations
Kickoff meeting
Close out meeting
Lessons learned sessions
Paraphrase & Validate
Drawings
Schedule update
If you think you have communicated enoughgo back and do it again. Use different formats. Frequently use modes of
communication that allow you to see the whites of their eyes
5) SCHEDULE MANAGEMENT
Ensure the timely completion of the project.
Identify the specific activities that must be performed to meet deliverables.
Document dependencies
Estimate the time to complete an activity
Schedule development (start and end dates
Schedule control
Klipsteins Second Law - The firmness of delivery dates is inversely proportional to the tightness of the schedule.
Time management1. Purpose: Create a realistic schedule with the team
2. Identify the activities (tasks)
Activities are action steps (HOW) and different from deliverables that are tangible results (WHAT)
Use the WBS and scope statement
Develop activity lists and revise the WBS
3. Sequence activities
Consider dependencies
4. Estimate durations (time)
Top down, bottom up estimates, Monte Carlo simulations
Estimating formulae (PERT estimates)
Expert opinion
Consider resource capabilities Look at similar projects
5. Develop the schedule (Gantt chart)
Document assumptions and decisions
Use project management scheduling software e.g. MS Project
6. Control the schedule
Performance reports, change requests, time management plan, corrective action, lessons learned. E.g. baseline
Gantt chart and then update
Frequency,
Roles and responsibilities
Control techniques e.g. meetings, 1:1
Estimating formulae - PERT Estimate (weighted average)
[Pessimistic + (4 x Likely) + Optimistic]/6
Pessimistic time to get to work = 30 min
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Optimistic time to get to work = 10 min
Likely time to get to work = 15 minutes
PERT Estimate = 30 + (4x15) + 10/6
100/6=16.6 = 17 min
6) HUMAN RESOURCES MANAGEMENT
Make the most effective use of the people involved in the project. Planning
Acquisition
Development
1. Organizational plan
Organizational chart, roles and responsibilities
Linkages between project and functional areas, and other business units.
Staffing needs
- Unions, human resources department/practices, constraints
- RACI+
- Staffing plan (training, orientation, job descriptions, performance evaluations, redeployment), project
organizational chart2. Get staff
- Assess experience, interests, personal characteristics, availability
- Negotiate
- Beg and borrow but dont steal
3. Develop the team
- Team building, reward and recognition program, support practices
4. Dont control people
- Managerial control is different from micromanaging
5. Listen to understand
6. Be responsive
- Provide positive feedback
- Act on problems in a timely manner
7. Deal with problems
- They wont go away, but will get BIGGER
8. Provide constructive criticism
9. Document appropriately
10. Take time to have FUN
RACI CHART
7) QUALITY MANAGEMENT
The processes required to ensure the project will satisfy the needs for which it was undertaken. Identify what to measure
periodically review the project. Monitor specific results to determine if they meet the relevant quality standards.
1. Plan for quality
Quality product and quality project management practices
Quality standards
- Conform to specifications (project produces what it said it would)
- Fitness for use (satisfy needs)- Prevention vs. inspection
- Plan, do, check, act
- Benchmark, checklists, flow charts, cause/effect diagrams
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2. Quality management plan
Organizational structure, processes, resources, procedures, responsibilities to ensure quality plan is implemented
Quality metrics
Checklists
3. Quality Assurance
Follow the quality management plan, audits, and improvements
4. Quality control
Process and product results Control charts, Pareto diagrams, trend analysis
QUALITY TIPS
Start with a clear view of quality in mind
What is quality?
Implications for ALL knowledge areas
8) COST MANAGEMENT
Ensure the project is completed within the approved budget
1. Plan resources(people, equipment, materials)
Consider WBS, scope statement, organizational policies, staff pool Identify resource requirements
2. Cost centers at Your Company?
Time is money
3. Cost budgeting
Resource leveling
Cost baseline
4. Control costs- Performance reports, change requests, cost management plan, corrective action, lessons learned,
e.g. budgeted, actual, variance (with explanation)
Time and cost tips
Its OK to ask. Talk to subject matter experts. Avoid single point estimates, use validated range estimates.
Factor in the learning curve, resource productivity, experience level etc. Use the appropriate tools, techniques, rules of thumb
Document assumptions for estimates
Negotiate
9) PROCUREMENT MANAGEMENT
Acquire goods and services to attain project activities from outside the performing organization. (aka Vendor
Management, Subcontractor Management, Supplier Management)
1. Plan procurement needs(goods and services external to the firm that you need to deliver the product)
Make or buy decisions
Contract type options (risk sharing)
2. Solicitation
Procurement management plan
Vendor selection process and criteria
Proposals, contracts, legal issues
3. Select and manage sources(vendors, partners)
Negotiations Manage
contracts
4. Close contracts
Formal acceptance and closure
Procurement Tips
1. Develop charters with vendors and partners
Rules of the game, conflict management guidelines, escalation process2. Take lead times into account
3. Do risk management on procurement (and all other knowledge areas)
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5-STEP PROJECT MANAGEMENT
STEP 1- DEFINE THE PROJECT
Agenda
- State the problem
- Develop project goal
- Develop project objectives
- Identify assumptions and risks
- Identify stakeholders
- Criteria for project success
- Project Charter/overview document
State the Problem/Opportunity1. Specific questions must be asked before a project begins:
What is the problem and what are the opportunities?
Do we really need the project?
2. If these questions cannot be answered, then:
Pick the wrong project
The project will probably not succeed
3. Document the need and the benefits to the organization for undertaking the project
Short, crisp and to the point
Descriptor for those who although not directly involved on the project team are indirectly involved in supporting
the project
A need that must be addressed
- New product, service, process, facility, or system- It may involve opening a new market
Example
Membership in PM Association has declined in the past four years and attendance at conference has declined in the
past three years. The viability and financial stability of the Association depends on maintaining membership and
successful annual conference.
State Project Goal
A statement of purpose and direction helps to direct the course of the project effort
Initiates the project
- Serves as a point of reference for settling disputes and misunderstandings
- Clarifies expectations- Helps in justifying requests for resources
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Goal Statements
1. Action oriented
2. Short and simple
3. Understandable
- Prepare and launch the International Space Station on April 21, 2000, from Cape Canaveral, Florida
- Connect France and England via a covered tunnel and railway under the English Channel, facility to be opened to
traffic no later than September, 1996
4. Design and complete pilot testing by March 2002, a product accounting software package that performs basicfinancial analyses for the company
5. Obtain a BSc degree in engineering from U of C by spring, 2004
Example
Reverse the downward trend in membership and annual conference attendance by organizing a highly successful
conference.
Develop Project Objectives
1. Objectives represent major components or milestones
- Objectives are sub-goals
2. Roadmap to aid decision makers understand the purpose of the project
3. Basis for determining project time line and resource requirements
4. To achieve the goal all objectives must be realized
Example
Develop the Program
Set the Conference Site and Date
Design and Implement the Marketing Plan
Criteria for Evaluating Project Success
Project expectations:
Project on time
Within budget
According to specifications
Happy client
Example
At least 200 of 450 PM Association membership will register to attend
At least 50 of previous years conferences attendees will attend
At least 1.5% of the non-members receiving conference brochure will attend
At least 5% of the non-member attendees will join PM Association
Identifying Assumptions and Risks
Each objective will have its own risks and assumptions
Helps think through the project process and issues associated with execution
Identifies resource needs and issues involving resource availability
Identifies potential delays and the impact of these delays Potential cost overruns can be predicted and resolved
Example
Interest in PM Association can be renewed through the annual conference
A quality professional program will attract members and non-members
Key speaker(s) fail to show up or submit written paper
Stakeholders
Individual or organisations actively involved in the project or directly or indirectly affected by its execution or results
Roles must be identified at the start of the project
Needs and expectations must be communicated and influenced in a positive and constructive manner so that
the project will be success for all How to find them?
- Ask who will decide on the success of your project
How to involve them?
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- Ask for (appropriate) advice
- Get their buy-in to project plans
How to work with them?
- Active listening
- Understand their interests and needs
- Keep everyone informed
How to keep them on side?
- Respond to concerns- Manage expectations and make adjustments
Who are the People Involved?
Owner, Contractor, Consultant (in-house and outside)
Sub-consultants, Subcontractors
Suppliers (Vendors)
Trade unions
End users
Operators
External Issues
Factors within a Project Managers sphere of responsibility, but which he or she has no formal control or authority over: Corporate interests
Operating priorities
Financial interests
Government interests and actions
Public interests
Economic conditions
Social priorities
Common Concerns
Political fallout
Social, cultural, economic impacts
Benefits:- Training
- Employment
- Business opportunity
Way of life Just go away!
Public Involvement - Right to know
Environmental protection and conservation
Loss of control Fear of change
Power and influence
Native land claims
STAKEHOLDER MANAGEMENT PROCESS
1. Monitoring
2. Analysis
3. Assessment
4. Applications
- Educate and communicate
- Mitigate- Compensate
5. Appraisal and feedback
Summary
Understand the role of the various stakeholders
Identify the real nature of each stakeholder and their interest in the project
Understand their motivation and behavior
Issues external to the project that can impact the outcome of a project
Project manager should:
- Understand what they are
- Consider them early
- Analyze their potential impact- Decide which to mitigate and have a plan
Assess how they will react to various approaches
Remember that projects managed in ignorance of External Influences:
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- Never get off the ground
- Mid-flight crash
- Technical success but commercial failure
Charter/Overview Document
1. The define phase focuses on producing a project Charter/Overview document which is used as:
- A tool in the initial go/no go decision by management
- A general information document for other managers- An early statement of the project goal and direction
- A statement of the problems and opportunities to be addressed by the project
2. Once the project is approved for go ahead, the Project Charter/Overview becomes the foundation for the detailed
planning activities which follow and:
- Provides a control point for reporting project progress and an audit point
- Reference base for addressing questions and conflicts
- Tool for building the team
3. When defining a project you should be able to:
Describe what is expected
Define the project characteristics
Develop a project Charter/overview
- Problem statement
- Project goal and objectives
- State the risks and assumptions
- State success criteria
STEP 2 - PLAN THE PROJECT
Agenda
Work Breakdown Structures (WBS)
Estimate Time and Cost
Work Breakdown Structure (WBS)
1. Reduces complex projects to a series of tasks that can be planned
2. WBS represents the project in the form of a hierarchy of goal, objectives and activities
- Identifies activities to be done from beginning to completion of the project
3. Foundation for the definition, planning, organising and controlling of the project
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Composition of a Project WBS
WBS
1. Activities in the WBS are broken-down until the entire project is displayed as a network of separately identified
activities
2. The breakdown of activities continues until there are no overlapping activities3. Each activity should be:
4. Status and completion are easily measured
- Of a specific time duration with defined beginning and end
- Easy to derive time and cost estimates
- Of a single purpose and have clearly understood deliverables
- Responsibility for completion clearly assigned
The 5-step procedure: Example
1. Partition the project into its major objectives
4.1 Develop the Program
4.2 Set the Conference Site and Date
4.3 Design and Implement the Marketing Plan
2. Partition the objectives into activities
1.1 Develop the Program
1.1.1 Establish Theme and Topics
1.1.2 Obtain Speakers
1.1.3 Prepare Handout Materials
1.2 Set the Conference Site and Date
1.2.1 Set Conference Date
1.2.2 Select and Commit Conference Site
1.2.3 Confirm Arrangements
1.3 Design and Implement the Marketing Plan
1.3.1 Develop and Print Conference Brochure
1.3.2 Obtain Label Sets for Direct Mail1.3.3 Mail Conference Brochures
1.3.4 Receive and Acknowledge Registrations
3. Check each activity for compliance with activity characteristics and further partition any that do not comply
1.1.3 Prepare Handouts
1.1.3.1 Obtain Handout Materials from Speakers
1.1.3.2 Prepare and Print Conference Notebook
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Estimating Activity Time
1. Time to complete a task is random:
Skill levels and knowledge of the individuals
Machine/equipment variations
Material availability Unexpected events
- Illness
- Strikes
- Employee turnover and accidents
- Changed soil/site conditions
2. We know unexpected events and occurrences will happen but are unable to predict the likelihood with any
confidence
- We must however account for the possibility of the occurrence of these events
3. Use a statistical relationship if you can estimate
4. Optimistic completion
5. Pessimistic completion time
- Most likely completion time- Can acquire this information from discussions with individuals that have first hand experience in projects
- Optimistic Completion Time - is the time the activity will take if everything goes right
6. Pessimistic Completion Time - is the time the activity will take if everything that can go wrong does go wrong but the
project is still completed
7. Most Likely Completion Time - is the time required under normal circumstances
8. It can also be the completion time that has occurred most frequently in similar circumstances
9. To compute the expected duration time the following formula is used:
E = (O+4M+P)/6
E = Expected duration time
O = Optimistic time
M = Most likely time
P = Pessimistic time
Estimated times for conference planning
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Sequencing Activities
Bar chart
Produce a Logical Network
- Critical Path Method
- Arrow Diagrams
Precedence Diagrams Identify Critical Activities
Locate the Critical Path
Floats
Bar Charts/Gantt Chart
Most projects, however complex, start by being depicted on a bar chart. The principles are very simple:
- Prepare list of project activities
- Estimate the time and resources needed
- Represent each activity by a bar
- Plot activities on a chart with horizontal time scale showing start and end
RACI Charts Responsibility - Action - Coordination - Information
Identify the roles of participants in each element of a project
Effective communications road map
4 to 8 weeks look ahead
Update weekly to:
Reset expectations
Ensure right people involved in detailed planning
Ensure everyone knows what needs to be done by whom
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CPM: Critical Path Method
1. Graphic network based scheduling technique
- Arrow Diagrams
- Precedence Diagrams
2. Use activities created by the WBS process
3. Analysis of timing and sequencing logic
- Aids in identifying complex interrelationship of activities
4. Allows for easy revision of schedule and simulation and evaluation of the impact of changes5. Also used as a control tool during execution of the project
Producing a Logical Network
The sequencing identifies activities that must be completed before another activity can start and which activities can
occur simultaneously. Different methods:
1. Low-tech approach: use post-it labels
- Each label has one activity written on it
- Through iterative process the labels can be arranged and rearranged
2. Ask yourself the following:
- Which activities must be completed before this activity starts?
- Which activity cannot start until this activity is completed?
- Which activities have no logical relationship with this activity and therefore take place at the same time
(concurrent activities)?3. Identify immediate predecessor activities,which are activities that must be completed before another activity can
begin
Steps in Producing Networks
1. List the activities
2. Produce a logical network of activities
3. Assess the duration of each activity
4. Produce a schedule - determine the start and finish times and the float available for each activity
5. Determine the time required to complete a project and the longest path on the network
- The longest path is the Critical Path
6. Assess the resources required
Activity sequencing
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Sample Network
Activity Times/Critical Path
Critical Path
1. Calculations for precedence diagrams and arrow diagrams are essentially the same
2. Critical path is where there is zero slack time
3. If an activity takes longer than estimated on the critical path then the project will be delayed
4. The critical path can change if there is a delay that make an alternative path longer
Float (Slack)
- Slack or float time is amount of delay that could be tolerated in the start or completion time without causing a delay in
completion of the project
- Total float or calculations to determine how long each activity could be delayed without delaying the project
- Total float = LF - ES - duration
Summary
- Critical path identifies the project time requirements
- Slack or float time is amount of delay that could be tolerated in the start or completion time without causing a
delay in completion of the project
- Zero slack time equals the critical path
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2. PROJECT SELECTION
A. General principles
Programme and Measure Objectives
Economic Impact taking account of Deadweight and Displacement
Financial Viability PPP and productive Sector Projects
Cost effectiveness
Environmental Impact Impact on equality of opportunity
Impact on poverty
Impact on rural development
B. Project Appraisal
Procedure
1. Idea
2. Initial contact
3. Business Plan / Formal Application
4. Site visit to project5. Appraisal by staff
6. Assessment by Evaluation Committee
7. Board decision
Criteria for Assistance - You must show:
that the project is commercially viable
That there is a market for the product or service
That adequate finance will be available to fund the project
That the promoter has the management and technical capacity to handle the project
That the promoters tax affairs are in order and proper company structure
Principal Appraisal Techniques
1. Financial Analysis
2. Cost Benefit Analysis
3. Cost Effectiveness
4. Scoring ; Weighting ; Ranking
5. Multi Criteria Analysis (M.C.A)
1) Financial Analysis
2) Cost Benefit Analysis
Application - Essential to demonstrate the economic costs and benefits of projects from the perspective of the
national economy or social welfare
Key features Comprehensive Comparison of costs and benefits, including non-market. Treatment of risk. Can
include estimation of multipliers Limitations - Impacts require common monetary numeracies. Data demands can be considerable Can have
inadequate political or social acceptability
3) Cost Effectiveness
4) Scoring, Weighting, Ranking (SWR)
The criteria against which projects will be appraised are identified. A weighting is assigned to each criteria based on
importance (no weighting = equal value). Each project receives numerical score against different criteria. Different project
applications ranked against each other.
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C. Transparency Issues
Public Promotion
Eligibility Criteria Published
Criteria for selection available
Weightings for criteria available
Decisions made by Committee
Conflicts of interest avoided (Declarations)
Information given to unsuccessful applicants
Competitive or queuing basis
Appeals system in place
D. Project Selection
Criteria
Included in Operational Programme Objectives
Measure specific objectives
Economic Impact
Financial Viability
Cost-Effectiveness
Horizontal Principles: Environment: rural development & Poverty: Equality
Scoring: Weighting: Ranking
Procedure
Initial call for applications 2 stage process
1. Assessment of Proposals
Initial review by Regional Tourism Organisation
Assessment and scoring of proposals by Filte Ireland
Assessed by Filte Ireland Assessment Committee
Considered and approved by Product Management Board
2. Short-listed applications complete detailed proposal form
3. Evaluation by Filte Ireland evaluation team
4. Assessment Committee review recommendations
5. Product Management Board consider approve, defer or reject
E. Procedure Monitoring & Evaluation
Monitoring of Programme at three levels
- Implementing Agency
- Monitoring Committee level
- National (NDP/CSF)
Grantee must retain all records and have available for inspection
Retain records of account for 6 years (Irish Law)
Retain records 3 years following closure of programme
Grantee must file annual financial statements
Grantee must file annual financial statements Grantee may have to provide evidence of satisfactory management and financial control procedures
Work must comply to all planning conditions
Regular progress reports on work
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Security Deed of Covenant or Mortgage
Grant paid in two installments Interim and Final
- Paid eligible expenditure
- Evidence matching funds
- Check no grant aid from other sources
F. Project Financing
1. Public Sector
- Project provision included in annual budget estimates of Central Government Department
- EU receipts also included
- Recouped in arrears by Exchequer following verification of expenditure
2. Private Sector
- Project Approved in advance of commencement
- Project payments made in arrears on basis of verified expenditure (stage payments allowed)
- Balance of funding provided by promoters own resources, borrowings or other equity investment
- Equity and loan finance also included
G. Tendering
Quotations and Tenders
- Up to 800 Two oral quotations
- 800 to 8,000 Two written quotations
- 8,000 to 16,000 Three written quotations
- 16,000 to 32,000 Four written tenders
- 32,000 to 160,000 Full tender in at least two regional newspapers and/or national newspapers
- 160,000 and over Advertisement in Official Journal of EU and national newspapers
H. Role of Implementing Body
- Design of overall scheme
- Seek applications by public advertisement
- Review and approval of project applications received from project promoters
- Ongoing monitoring of projects- Reviewing progress expenditure, final project costs and irregularity reports if applicable
- Review, approval and payment of project manager payment claims
- Prepare claims for Managing Authority on to Paying Authority
I. Project Management IT Based System
- Financial Control Systems
- Financial Tables
- Physical Indicators
- Annual Implementation Reports
- Other Reports by period county, field of intervention
- Actual expenditure reports
- Claims for draw down
- Payment details
- Report on receipts and outstanding claims
- Funds allocation, dispersal instructions
J. Project Reporting to Monitoring Committee
- Introduction description measure, commentary on progress
- Expenditure to date
- Performance Indicators progress to targets
- North/South Co-operation
- Information and Publicity Requirements
- Horizontal Issues Environment; Gender Equality; Poverty; Rural Development
- Future Prospects
- Adjustments required
- Annexes
K. Value for Money - Definitions
1. Additionality: Measure of economic output i.e. amount of project output compared to what would have occurredwithout intervention
2. Deadweight: Opposite to additionality i.e. could project have proceeded without State Aid
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3. Displacement: Activities that would or could have been financed by the private sector are displaced by publicly
subsidized activity
4. Cost-effectiveness: Projects selected contribute the largest amount possible to policy objectives at the minimum
possible cost.
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3. PROJECT FEASIBILITY STUDY
Feasibility vs Business Plan
FEASIBILITY BUSINESS PLAN
1. The feasibility study provides an investigating function 1. The business plan provides a planning function.
2. Answers the question: is the project viable? 2. Lays out the actions to be taken to bring the ideas to
reality.3. The feasibility study outlines and analyses several
alternatives or methods of achieving project success.
Therefore it assists to narrow the scope of the project
to identify the best project scenario(s) to about two or
three.
3. The business plan focuses on only one alternative or
scenario.
4. The feasibility study is conducted before the business
plan.
4. A business plan is prepared only* after the business
venture has been deemed to be feasible.
5. It is a decision point; to continue or not based on the
outcome.
5. The outcome does not provide information to continue
or drop the project.
6. Feasibility provides information to choose the blue
print or roadmap.
6. The business plan provides a blue print or roadmap.
Some argue that:We know its feasible. An existing business is already doing it. Feasibility has been done a few years ago so there is no
need to do another one. Feasibility studies are just a way for consultants to make money. The business is too small for a
feasibility study. The market analysis has already been done by the business that is going to supply the equipment. By
hiring a general manager, the study can be accomplished. Feasibility studies are a waste of time. Money is to be spent
on building, tie up the site and bid on the equipment; why spend money on feasibility.
Reasons For Feasibility
Once decisions have been made about proceeding with a proposed business, they are often very difficult to change. An
entrepreneur may have to live with these decisions for a long time. Successful businesses thoroughly examine all of the
issues and assess the probability of business success first before going into it. Feasibility studies gives focus to the
project and outline alternatives and narrow project alternatives Feasibility studies bring to the fore new opportunities
through the investigative process. They identify reasons not to proceed. They enhance the probability of success byaddressing and mitigating factors earlier on that could affect the project. Feasibility studies provide quality information for
decision-making. They help to increase likelihood of finding funds and investors for the project. And provide
documentation that the business venture was thoroughly investigated.
Aspects of Project Preparation and Analysis
1. Technical
2. Institutional-Organisational
3. Managerial
4. Social
5. Commercial
6. Financial
7. Economic
1. Technical - Relates to underlying principles of knowledge where the product and or the method of the project. For a
crop production project, the concerns will be agronomy; knowledge of plants and crops, effects of weather, soil
conditions, seeds; generally, inputs and outputs. The relationship among the various factors; with the final product or
method in mind. Example: Internet caf project; the knowledge area is information and communications technology
(ICT).
Issues about computers,
Internet connectivity,
networking of computers
business management
The purpose is to assess the current status of the essentials with the view to identify gaps. The team to be selected
or put together depends on the technical areas involved.
2. Institutional, organisational.
How does the proposed project relate to the various levels of power as well as the existing institutions?
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What are the links of the projects and team with existing government departments and organisations are
considered here?
Within the project, what are the lines of authority, delegation, line of reporting, and organisational procedures?
Will the project keep and operate its own accounts?
3. Managerial
Assessment of availability of staff to manage the project; if there is a gap will there be the need to train or hire
others locally or for expatriate staff? Are the target groups equipped to use the product or adopt the technology or innovation being introduced?
4. Social
Social implications of projects are important. For public projects the social aspect vis--vis the objectives are crucial.
For non-public projects the review of social aspect is to assess the negative impact on society if the project is
implemented. Where positive influences they are often secondary in importance. The focus is on income distribution,
the response of the project to national objectives. Effect of project on employment, possible side effects on some
people, issues of quality of life. For the company, how does the project fit into the mission and vision of the
organisation? Environmental issues are social issues. Both locally and internationally, there are regulations and laws
on governing the effects of undertakings on the environment. For example, what are the possible effects of the
undertaking on the physical environment; water, air, soil. Noise pollution is to be considered. Projects in mining do
have tremendous adverse effects on the environment. The outcome of these considerations is to identify the enable
the planners to find ways of mitigating the environmental effects. At this stage environmental regulations have to be
reviewed to appreciate the requirements and limits within which the project can or cannot operate.
5. Commercial - This relates to the product.
The sale of the output produced, arrangements for sale, and pricing.
This stage is also referred to as market feasibility stage.
The demand of the product or service is needs to be assessed; the potential demand as well as the effective
demand, the size of the market, segments, and targets of the product.
What advertising means are available, media consumption habits of the target market or consumers?
Questions like what is the buying behaviour of the target market, income their income distribution and some
other characteristics of the customers.
On the input side what are the sources of the raw material, what are the pricing mechanisms, regularity of
supply etc.
6. Financial
Under the financial aspect, the totality of the financial dimension of the proposed project is examined. In social or
public projects, there are several participants. These participants in an agricultural project include; farmers, suppliers,
project agencies and customers. In a production and distribution project of a manufacturer, the participants are
customers, distributors, transporters, and finally the company or manufacturer. Financial effects must be examined
for each participant because participants are impacted differently. The financial effects of the participants in the
project are examined here. Their effect on them must be appropriately assessed. Separate budgets and accounts
(income and expenditure, balance sheet and cashflow) must be prepared. The aim is to make judgements of the
financial efficiency, incentives, creditworthiness and liquidity of the project and its participants. In private sectorprojects the proforma or projected final accounts (profit and loss, balance sheet, and cashflow) are prepared. And this
is from the perspective of the company initiating the project. It must be stated, that, several participants (suppliers,competitors, customers) are affected differently, but the company is mostly interested in effects on her. At this stage
what is most required to assess financial feasibility using the cashflow.
The others only serve as an input. Indeed, some approaches to building the cashflow do not use the income
statement and balance sheet. From the cashflow the feasibility of the project is established using measures such as
Net Present Value (NPV), Internal Rate of Return (IRR), and Benefit Cost Ratio (BCR) among others. The aim is to
find out if the project is viable or not. The issue of profitability does not arise here at all. If the project is viable, then, a
detailed project plan is prepared. In the case of projects with profit motive, a detailed business plan follows. The time
frame for considered fro projections in feasibility study is quite long, longer than that of the business plan which is the
magic five years. In unstable economies, this can be as short as three years.
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7. Economic
Economic aspects of project analysis use financial aspects as raw materials. Essentially, the financial analysis is
adjusted to accomplish economic analysis. The overarching goal of economic analysis is the determination of the
contribution of a proposed project to the total economy. The principal question is: does the level of contribution of the
project warrant the use of scare resources of the society to execute it? Despite the complementary nature of the
financial and economic analysis there are some differences.
Basis Financial Analysis Economic Analysis
1. Taxes Treated as costs to the projectPart of project benefit, treated as transferpayments and not to be considered ascost.
2. Subsidies Treated as returns to the projectCost to society because it is expenditureof resources by government thus fromsociety
3. Prices Market prices
Prices adjusted to reflect economic orsocial values; the prices are shadow oraccounting prices. Subsides and taxesare used in the adjustment.
4. Interest oncapital
Treated thus: interest paid to capital suppliersexternal to the economy is subtracted frombenefits. The result is what is available toowners of capital. Interest imputed to theentity from whose dimension analysis isbeing done is part of total return not cost
Used as quoted. It is total return tosociety
5. ViewpointPrepared from the viewpoint of an individual;person, company etc.
From the viewpoint of the economy orsociety as a whole.
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4. PROJECT RISK MANAGEMENT
A. Risk management
Risk management is concerned with identifying risks and drawing up plans to minimise their effect on a project.
A risk is a probability that some adverse circumstance will occur.
- Project risks affect schedule or resources
- Product risks affect the quality or performance of the software being developed
- Business risks affect the organisation developing or procuring the software
B. The risk management process
Risk identification
- Identify project, product and business risks
Risk analysis
- Assess the likelihood and consequences of these risks
Risk planning
- Draw up plans to avoid or minimise the effects of the risk
Risk monitoring
- Monitor the risks throughout the project
C. The risk management process
D. Risks and risk types
E. Risk
1. Identification
Technology risks
People risks
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Organisational risks
Requirements risks
Estimation risks
2. Analysis
Assess probability and seriousness of each risk
Probability may be very low, low, moderate, high or very high
Risk effects might be catastrophic, serious, tolerable or insignificant
F. Risk analysis
Risk Probability Effects
Organisational financial problems force reductions in the projectbudget.
Low Catastrophic
It is impossible to recruit staff with the skills required for the project. High Catastrophic
Key staff is ill at critical times in the project. Moderate Serious
Software components that should be reused contain defects whichlimit their functionality.
Moderate Serious
Changes to requirements that require major design rework areproposed.
Moderate Serious
The organisation is restructured so that different management areresponsible for the project.
High Serious
G. Risk planning
Consider each risk and develop a strategy to manage that risk
Avoidance strategies
- The probability that the risk will arise is reduced
Minimization strategies
- The impact of the risk on the project or product will be reduced
Contingency plans
- If the risk arises, contingency plans are plans to deal with that risk
Monitor
- Assess identified risks regularly to decide whether or not it is becoming less or more probable
- Assess whether the effects of the risk have changed
H. Risk monitoring
Assess each identified risks regularly to decide whether or not it is becoming less or more probable
Also assess whether the effects of the risk have changed
Each key risk should be discussed at management progress meetings
Key points
Risks may be project risks, product risks or business risks
Risk management is concerned with identifying risks which may affect the project and planning to ensure that these
risks do not develop into major threats
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5. PROJECT SELECTION
In what steps of the methodology is financial feasibility analysis relevant?
STEP 4 FEASIBILITY ANALYSIS
Questions Management Will Ask
1. Is the project profitable?
Initial investment costs
Annual operating costs and savings
Cost of operating inputs
Cost of waste management Less tangible costs
Revenues
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2. Determine availability of internal investment funds for bigger projects
3. Obtain external financing for remaining projects
Capital Budgeting Process - Process by which organisation decides:
Which investment projects are
Needed
Possible
Special focus on projects that require significant up-front capital investment How to allocate available capital between different projects
If additional capital is needed
Capital Budgeting Practices
Vary widely from company to company. Vary from country to country
Larger companies tend to have more formal practices than smaller companies
Larger companies tend to make more and larger capital investments than smaller companies
Some industry sectors require more capital investment than others
Typical Project Types and Costs
Maintenance
Maintain existing equipment and operations
Improvement Modify existing equipment, processes, and management and information systems to improve efficiency, reduce
costs, increase capacity, improve product quality, etc.
Replacement
Replace outdated, worn-out, or damaged equipment or outdated/inefficient management and information systems
CASH FLOW
Cash Flow Concept
Common management planning tool. Distinguishes between
Costs: cash outflows
Revenues/savings: cash inflows
Types of Cash Flow
Outflow Inflow
One-time Initial investment cost Equipment salvage
value
Annual Operating costs & taxes Operating revenues
& savings
Other Working capital Working capital
Costs and Savings
Initial investment costs
purchase of the camera system, delivery, installation, start-up
Annual operating costs (and savings)
Operating input materials, energy, labour
Incineration fuel, fuel additive, labour, ash to landfill
Wastewater treatment chemicals, electricity, labour, sludge to landfill
Working Capital and Salvage Value
Working capital:total value of goods and money needed to maintain project operations
Raw materials inventory
Product inventory
Accounts payable/receivable
Cash-on-hand
Salvage Value:resale value of equipment or other materials at the end of the project
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Timing
Incremental Analysis
Needed for many CP or EE projects
Compares cash flow of implemented options to the business as usual cash flow Covers only the cash flows that change
PROFITABILITY INDICATORS
Definition:
a single number that is calculated for characterisation of project profitability in a concise and understandable form
Common indicators
1. Simple Payback
2. Return on Investment (ROI)
3. Net Present Value (NPV)
4. Internal Rate of Return (IRR)
1. Simple Payback - Number of years it will take for the project to recover the initial investments. Usually a rule of
thumb for selecting projects, e.g. payback must be < 3 years
2. Return on Investment - The percentage of initial investment that is recovered each year
3. Net Present Value - Money Loses its Value
Question:
If we were giving away money, would you rather have:
(A) $10,000 today, or
(B) $10,000 3 years from now
Explain your answer.
Inflation
Money loses purchasing power over time as product/service prices rise, so a dollar today can buy more than a dollar
next year
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Return on Investment
A dollar that you invest today will bring you more than a dollar next year having the dollar now provides you with an
investment opportunity
Time Value of Money
Money is worth more now than in the future because of
Inflation
Investment opportunity
Time value of money depends on
Rate of inflation
Rate of return on investment
Cash Flows from Different Years
Before you can compare cash flows from different years, you need to convert them all to their equivalent values
in a single year
It is easiest to convert all project cash flows to their present value now, at the very beginning of the project
Converting Cash Flows to Present Value
Converting Cash Flows to Present Value
Discount rate:
Converts future year cash flows to their present value
Incorporates:
Desired return on investment
Inflation
Reverse of an interest rate calculation
Discount Rate & Interest Rate
Invested at an interest rate of 20%, how much will $10,000 now be worth after 3 years?
$10,000 x 1.20 x 1.20 x 1.20 = $17,280
At a discount rate of 20%, how much do I need to invest if I want to have $17,280 in 3 years?
$17,280
1.20 x 1.20 x 1.20 = $10,000
Which Discount Rate? Equal to the required rate of return for the project investment, based on
A basic return - pure compensation for deferring consumption
Any risk premium for that projects risk
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Any expected fall in the value of money over time through inflation
At least cover the costs
At least cover the costs of raising the investment financing from investors or lenders (i.e. the companys cost of
capital)
A single Weighted Average Cost of Capital (WACC) characterises the sources and cost of capital to the company
as a whole
Calculating Present Value
The Value of a Future $1
Net Present Value (NPV)
Definition: sum of present values of all projects cash flows
Negative (cash outflows)
Positive (cash inflows)
Characterises the present value of the project to the company
If NPV > 0, the project is profitable
If NPV < 0, the project is not
More reliable than Simple Payback or ROI as it considers
Time value of money
All future year cash flows
Sensitivity Analysis
In business as usual scenario PLS Company needs waste water treatment plant in year 3: $150,000 investment
With QC project: $95,000
Savings: $55,000
Also consider taxes!
Pollution taxes / fees
Tax deductions for equipment depreciation
Tax deduction for environmental projects
4. Internal Rate of Return (IRR) Definition: discount rate for which NPV = 0, over the project lifetime
Tells you exactly what discount rate makes the project just barely profitable
Similar to NPV, considers
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Time value of money
All future year cash flows
Profitability Indicators Summary
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5. FINANCIAL ANALYSIS
Financial Analysis Defined:
Comparing the costs and benefits over time to determine whether a project is profitable or not. To achieve this the
following financial indicators are used:
Net Present Value (NPV)
Internal Rate of Return (IRR)
Sensitivity Analysis
Steps in conducting a Financial Analysis:
1. Identify the costs
2. Identify the benefits
3. Enter the costs and benefits into the financial calculator
4. Assess the financial indicators to determine if the project is financially favourable.
Defining Costs
There are different ways of defining costs:
By type:
Capital costs
Operating costs
By function:
Development costs
Operational costs Maintenance costs
By behaviour:
Fixed costs
Variable costs
By time:
Recurring costs
Non-recurring costs
Capital Costs
Capital costs are the expenses incurred in purchase of items that are recorded as assets; their value is depreciated over
time and they are recorded in the Balance Sheet.
Identify the capital costs for the project for the following items:
Equipment
Non-consumable Materials*
Infrastructure* Non-consumable materials are capital costs because these are materials that persist (eg. furniture, bricks)
Operating Costs
Operating costs are expenses incurred in the execution of the project or in the operation of the business (after the
project) They are not depreciated over time and are recorded in the profit and loss statement.
Identify the operating costs for the project for the following:
Internal business resources
Internal IT resources
External resources
Office accommodation
Licenses
Support
Training
System administration
Equipment hire
Consumable materials*
Travel Accommodation
Identifying the Benefits
Identify the benefits that the project will provide, and the value that can be assigned to each benefit.
Enter the costs and benefits into the Financial Calculator
For each year enter the anticipated capital and operating expenses into the financial calculator spreadsheet.
For each year enter the anticipated benefits into the spreadsheet.
Adjust the discount rate if appropriate.
Enter sensitivity values (% cost increase and % revenue decrease values)
The spreadsheet will automatically calculate the financial indicators
Assess the Financial Indicators
Financial indicators used in the spread sheet are: Net Present Value (NPV)
Internal Rate of Return (IRR)
Sensitivity Analysis
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The value of Money
The value of money changes over time.
With most projects, the financial benefits are realised at a different time to the costs.
Net present value (NPV) provides a means to compare these by adjusting the value to todays value.
This is achieved by modifying the future value by a factor that represents the change in value of money from todays
value.
This factor is called the discount factor. It is calculated as: 1 (discount rate / 100)
Investment Analysis
If the Net Present Value is less than zero then this indicates the project is not financially worthwhile.
Note: The discount factor is based on a discount rate of 13%. Hence at the end of the first year $1 is worth 87c, drops to
75.6c in the second year, 65.8c in the third year etc.
Internal Rate of Return
Is defined as the discount rate at which an investment has a zero net present value. The internal rate of return equates to
the interest rate, expressed as a percentage that would yield the same return if the funds had been invested over the
same period of time. Therefore, if the internal rate of return for the project is less than the current bank interest rate it
would be more profitable to put the money in the bank than execute the project
Sensitivity Analysis
Projects do not always run to plan. Costs and benefits estimated at an early stage of a project may indicate a profitableproject, but this profit could be eroded by an increase in costs or a decrease in the value of the benefits (the revenue).
Sensitivity analysis provides a means of determining the financial impact of this type of fluctuation. By entering an
anticipated percentage increase in costs or decrease in revenue the financial impact on the project can be identified by
looking at the change to the NPV or IRR measures.
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7. PROJECT FINANCE MANAGEMENT
PROJECT LIFE CYCLE
Conceptualisation :Project Proposal
- Feasibility Study
Planning :Organisational Structure
- Resources
- Establishment of standards Implementation :Monitoring & Controlling
Termination
- Disposal & Redeployment
CONCEPTUALISATION includes
Project Proposal - prepared to set out clearly, the rationale, proposed methods, costs and benefits.
Feasibility Study - resulting from careful examination of practicability, costs, markets and associated costs.
Important Ps
Product / Project Identification
Process ( Manufacturing & Project management)
Place (Project site, Markets, Sourcing)
Partners (Financial, Commercial) Promoters (Equity holders)
Feasibility Studies
Evaluation of risks & returns
Managerial potential
Economic considerations
Commercial feasibility
Financial capability
Technical Feasibility
Social Factors
Marketability
Compliance with statutory regulations Insurance / Risk management
KEY FACTORS
1. Location of the project
- - raw material availability
- - infrastructure facilities, etc
2. Size & Capacity levels
- - large plants are more economical
- - idle capacity is a huge loss
3. Technological Aspects
- - Production process, machinery
4. Management policies
- - Personnel, Sales, etc.
PLANNING includes
Project Report - prepared formally after conceptualizing the project & consists of write-up on the fine-prints of
the project and financials of the project
Project Appraisal & Evaluation - for the purpose of acquisition of resources
PROJECT REPORT
A project report is a pre-investment and comprehensive study of investment proposals of an organisation.
Project report encompass a thorough investigation relating to economic, technical, financial, social, managerial and
commercial aspects
FEATURES OF A PROJECT
Separate Entity
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Specific Purpose & Objectives
Limited Duration
Target dates for Commencement & completion
Fine-prints of the Project Report
1. Data collection, capacity determination
2. Promoters Information
3. Locational Advantages4. Technical Arrangement
5. Marketing & Selling Arrangement
6. Schedule of Implementation
7. Project Cost & Means of Finance
8. Profitability
Essentials for drafting a Techno Economic Feasibility Report (TEFR)
1. Comprehensive
2. Clarity
3. Elaborate
4. Informative
5. Synchronized
6. User friendly
Preparation of TEFR
1. Detailed description of the project, product description and uses
2. Promoters background & management profile
3. Infrastructure
4. Analysis of the schedule of implementation
5. Manufacturing processes, technical arrangement and process flow chart
6. Marketing
7. Financial summary of the promoters, group companies
8. Organisation Structure
9. Basic assumptions underlying the preparation of the TEFR
10. Analysis of the project cost11. Structuring the means of finance
Components of Project Cost
Land & Land Development
Shed & Building
Plant & Machinery- imported & indigenous
Miscellaneous Fixed Assets
Electrical installation
Margin money for working capital
Preliminary & pre-operative expenses
Provisions & Contingencies
Prospective Means of Finance
Share Capital - Equity or Preference
Term Loans - Domestic/External Commercial Borrowings or FCNR (B)
Debentures
Unsecured Loans & Deposits
Lease
Internal Accruals
Sops & Incentives
Venture Capital
Grants & Subsidies
Seed Capital Assistance
Deferred Payment Guarantee
Debt Securitisation Forfaiting
Factoring
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Working Capital
Financial Projections
Sales Forecast
Material Costs
Labour
Power & Fuel
Freight
Interest Costs
Depreciation
Taxation
Pooling of Capital
Term Loan
Investment
Acquisition of Fixed Assets
Working Capital
Miscellaneous Expenditure
Deferred Revenue Expenditure
Dividend
RISK
1. Assumption of Capital Budgeting
2. The projected cash flows occur in the same quantum as forecasted by the appraiser.
3. Quantification of Risk
4. Variation of the actual return from what was expected during the time of projections.
Risk analysis1. STANDARD DEVIATION
2. PROBABILITY TREE METHOD
3. SIMULATION METHOD
4. SENSITIVITY ANALYSIS
5. CERTAINTY EQUIVALENTS
6. ADJUSTED DISCOUNT RATE
7. CAPITAL ASSET PRICING MODEL (CAPM)
SENSITIVITY ANALYSIS
GOAL - Identification of variables of a project which could have an adverse effect on the overall outcome of an
investment proposal. Variables commonly used -
- Selling Price
- Cost of Factors of Production
- Initial Outflow
- Project Life
Role of Financial Instructions
Critical Appraisal
Lending
Visits & Interactions
Conducting feasibility tests
Evaluation of credit worthiness
Structuring Finance
Period of Loan
Grant of Moratorium
Credit Rating
Monitoring & Follow-up
Interactions with Financial Institutions
Conviction Evaluation
Attitude
Credit worthiness of promoters
Knowledge of the project Detailed study of the TEFR
Cordial & Positive Approach
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Sanction & Disbursal by Financial Institutions
Clearance by legal department
Acceptance of terms & conditions
Documentation
Creation of Charges
Disbursal
Term Loan Procedure
Submission of loan application
Processing
Appraisal
Issue of sanction letter
Acceptance of terms & conditions
Execution of loan agreement
Disbursement of Loan
Creation of security
Monitoring
ANALYSIS OF FINANCIAL RESULTS
1. Profitability
2. Balance Sheet - portrayal & scrutiny
3. Cash Flows
4. Break-even Point and Margin of Safety
5. Debt Service Coverage Ratio6. Fixed Assets Coverage Ratio
7. Sensitivity Analysis
8. Pay-back period
9. Internal Rate of Return
Important Qualitative Ratios
- Return on capital Employed
- Profit Margin
- Assets Turnover Ratio
- Inventory Turnover Ratio
- Pay-out Ratios
- Liquidity Ratios
- Current Ratio
- Debt Equity Ratios
- Interest Coverage Ratios
- Debt - Service Coverage Ratios
ANALYSIS OF FINANCIAL & OPERATING LEVERAGE
Quantitative Ratios
Units sold or consumed as raw materials
Unit realisation price
Trends in key ratios like sales, fixed assets, working capital & operating margin
Annualizing numbers especially for companies changing accounting years
Inter & Intra firm companies
Guidelines for Project Appraisal
Provision for Cost Escalation
Scrutinise sources of finance
Profitability adjustments
Examine Financial viability
Project Preference
Appraisal & Evaluation
Qualitative Factors
Intuition
Vision
Intangible Benefits
Strategic Aspects
Linkage between business planning and capital budgeting
Approach to decision making Strategic Planning & Financial Analysis
Organisational Considerations
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Summarizing Appraisal & Evaluation
Marketing
Technical
Financial
Economical
Managerial
Quality Control & Improvements
SWOT Analysis
Monitoring includes
Periodical Review
Updating/Revision of plans
Monitoring during Implementation
Adequate formulation
Sound project organisation
Proper implementation planning
Advance Action
Timely availability of funds
Judicious equipment, tendering & procurement
- Better contract management- Effective monitoring
- Applying network techniques like CPM & PERT model
Disposal of Assets includes
Redeployment of resources having alternative usage
CAPITAL BUDGETING
Planning for investment in capital assets. It involves proper project planning and commercial evaluation of projects to
know in advance technical feasibility and financial viability of the project
Capital Budgeting Process depends on
Size of the organisation
Number of projects
Direct financial benefit
Composition of assets
Timing of expenditure
Process of Capital Budgeting
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Capital budgeting techniques
PROJECT CASH FLOWS
Defined as the financial costs and benefits associated with a project
Costs & benefits evaluation
Capital Costs
Operating Costs
Revenue
Depreciation
Residual Value
Principles used in developing Projected Cash Flows
Incremental principle
Long Term Funds principle
Exclusion of Financing Costs principle Post Tax principle
INFLATION
Inflation has the tendency to cause a major impact on the ultimate success or failure of capital projects. The timing of
project appraisal is significant from the point of view of appraisers. In the likelihood that the presumed normal conditions
seldom exist for a project, inflation is bound to affect the project appraisal and implementation process.
Effect of inflation
Change in Projected Statement of Profitability and Cash Flows
Increase in rate of interest by lending institutions.
Increase in all Expenditure heads:
- Labour, Raw Material, Fixed Assets, etc,
- Remuneration to technicians & managerial personnel
Dealing with Inflation
Build into each Cash Flow element estimated rate of inflation on the basis of information available
Role of Venture Capitalist
Venture Capitalist fills this gap by providing Value Added Finance
What is Venture Capital
Spirit of partnership
- Alignment of interest
Active participation and Value Addition
Long term perspective Returns linked to performance
Risk - Reward sharing
Investment and not Assistance
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Approaching Venture Capital
1. Evolve Long Term Growth Strategy
Strong Value Proposition
- High probability of Commercialization
Scalable Business Model
2. Prepare well thought-out Business Plan
Business Focus & Growth Strategy
Milestones Realistic Projections
Exit Options
3. Prepare to dilute
Owning Large Part of a Small Business or Small Part of a Large one
4. Select a Partner (Strategic / VC) that
Shares Vision and Objective
Provides Strategic Inputs & Complementary Relationship
BUSINESS PLAN - WHAT VCFs LOOK FOR
SIMPLE -CLEARLY HIGHLIGHTING :
CORE STRENGTHS
Promoters & Team Value Proposition, Competitive Advantage
Key Customers, Market, Growth Potential
GROWTH PLANS
STRATEGY & TIME FRAME TO ACHIEVE SET MILESTONES
FUND REQUIREMENTS & DEPLOYMENT PLAN
REALISTIC FINANCIAL PROJECTIONS
Exit Options
Investment criteria
a) Risk Analysis
1. Promoters Background / Quality of Management
Vision Experience
Ability to Innovate / Change Rapidly
Ability to Build Team
Marketing and Branding Skills
2. Product / Service / Idea
Product Concept / Value proposition
Stage of Development / Level of Acceptance
Competitive Advantage and its sustainability / Entry Barrier
Scalability
3. Valuation
Revenue Model
IPR
Customer Base
4. Exit Options
Trade Sale
Merger
IPO
b) Value Addition
Implementation of Business Plan
- Using Network
- Team Building
- Resource Planning
Implementation of systems
Evolving Growth Strategy Provide Outside View
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VC Expectation Post Investment
Transparency / Corporate Governance
Openness to Constructive suggestions
Growth Appetite
- Organic / Non Organic Growth
Build Team
Build System
Preparedness to dilute and facilitate Exit
Social Cost Benefit Analysis (SCBA)
Urgency to fulfill long-term interest of the nation
Planning Commission decided to include social rate of return in feasibility study in case of public sector projects
Private Sector projects may be easily acceptable to Govt. institutions while granting various licenses &
approvals
A project with monetary loss but social benefit may be acceptable.
Indicators of Social Desirability
Employment Potential Criterion
Capital Output Ratio
Value added per unit of capital
Foreign Exchange benefit criterion Cost benefit ratio criterion
Relationship
Among employees
Between management, executives and work force
With financial institutions, banks and suppliers of capital
- customers
- competitors
- government bodies
- suppliers of resources
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8. SOURCES OF FUNDING
Learning Objectives
Strategic policy objectives in setting up projects
Investment strategies
Tactical objectives
Sources of funding
Introductory Comments
Setting up a project typically requires substantial investment
financial implications must be addressed well in advance
we will look at the likely costs of such projects
focus on ideas which are most critical
I. INVESTMENT STRATEGIES
Private ventures range in size from large, vertically integrated firms to small backyard operations
single common element: profit
investment decisions vary depending upon scale
large companies usually look at long-term trends, look at product life cycles sometimes invest in unprofitable pilot projects in order to receive better future return
II. TACTICAL DEVELOPMENT OBJECTIVES
Often specified with respect to desired rate of return (ROI)
other criteria used: net profit before taxes, cash flows, net present value
returns reflect the sources of and cost of the capital employed:
the cost of risk venture capital or equity depends upon return expected by shareholders
1. DEBT: EQUITY
Cost of funds borrowed from a funding/loan institution vary according to interest rates, duration, size of
loan cost of loans is less than the cost of risk equity
average cost of capital is dependent upon gearing ratio (debt:equity ratio)
when interest rates are low, D/E ratio is high
equity-based companies do better when interest rates are high
2. RATE OF RETURN
What is an appropriate rate of return?
Projects represents risk and are more hazardous compared to other ventures
Hence higher returns needed to be worthwhile
most banks look at 20-25% ROI as favorable
other option is to assign a risk premiumof 5% over normal return
the higher the intensity or more untried the technology, the higher the risk premium
III. Sources of funding
There are two basic sources of funding:
1) Capital assistanceand
2) private investmentcapital assistance = loans, grant aid, cash grants for developing nations, this comes from
external loans (World Bank, Commonwealth Development Corporation, Banco International de Desarollo, etc.)
grant aid: USAID, UNIDO, WHO, Swiss, Japanese, Norwegians developed countries: subsidies and enterprise
grants
1) CAPITAL ASSISTANCE
Most loans provided are low interest rate, extended repayment, concessionary in nature high percentage of
Asian Development Bank loans are of this type. 10% of all such loans are via the World Bank grant-aid/grants
are not paid back, real benefit is in reducing trade imbalances (export promotion loans) assistance is oftenprovided in form of technology transfer from government
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2) CREDIT INSTITUTIONS
Typically accessed by small borrowers
Consist of state finance corporations, and cooperative credit societies with numerous branches
Provide small loans promptlyminimum bureaucracy
Some technical and marketing assistance also provided
Briefing to borrowers on purpose and use of credit should also be provided (not often done)
3) PRIVATE INVESTMENT Can be foreign or domestic
private or public sale of equity (shares/stock)
backed up by commercial financing
venture capital or private equity
venture capital avail