Project Evaluation
CHAPTER
Project Evaluation
CHAPTER
3
Objectives
• Explain how individual projects can be grouped into programs;
• Explain how the implementation of programs and projects can be managed so that the planned benefits are achieved;
• Carry out an evaluation and selection of projects against strategic, technical and economic criteria;
• Use a variety of cost-benefit evaluation techniques for choosing among • Use a variety of cost-benefit evaluation techniques for choosing among
completing project proposals;
Project Evaluation
Select Project 0 23.1 Introduction
Identify project scope and objective1 Identify project
infrastructure 2 Analyze project characteristics 3 Identify the products and activities
4 Estimate effort for activity 5 Identify activity risks
6 For each activity
Lower level detail Review
Allocate resources
7
Lower level planning
10
Project Evaluation
3.2 Program Management
Program Management
“A group of projects that are managed in a coordinated way to gain benefit that would not be possible were the projects to be managed independently” (D.C. Ferns)
Program Management is a collection of projects that all contribute to the same overall organizational goals. Effective program management requires that there is a well-defined program goal and that all the organization’s projects are selected program goal and that all the organization’s projects are selected and tuned to contribute to this goal. A project must be evaluated
according to how it contributes to this program goal and its
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3.2 Program Management
Program Management
Strategic program
Business cycle program Infrastructure program
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3.3 Managing the allocation of resource within programs
Program Management
Program Manager Project Manager
Many simultaneous projects One project at a time
Personal relationship with skilled
resources Impersonal relationship withresource type
Need to maximize utilization of
resources Need to minimize demand forresources
resources resources
Projects tend to be similar Projects tend to be dissimilar
Project Evaluation
3.3 Managing the allocation of resource within programs
Project Evaluation
3.5 Creating a Program
Program Mandate
The new services or capabilities the program should deliver How the organization will be improved by use of the new
services or capability
How the program fits with corporate goals and any other
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3.5 Creating a Program
Program Brief
A preliminary vision statement which describes the new
capacity that the organization seeks – it is described as ‘preliminary’ because this will later be elaborated
The benefits that the program should create Risks and Issues
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3.5 Creating a Program
The Vision Statement
Program manager who would have day-to-day responsibility
for running program could well be appointed. The program manager is likely to be someone with considerable project management experience
This group can now take the vision statement outlined in the
Project Evaluation
3.5 Creating a Program
Blueprint
Business models outlining the new processes required Organizational structure
The information systems, equipment and other, non-staff,
resources that will be needed
Data and information requirements
Project Evaluation
3.5 Creating a Program
Blueprint –
Preliminary plan can be produced containing: The project portfolio
Cost estimates for each project The benefits expected
Risks identified
The resources needed to manage, support and monitor the The resources needed to manage, support and monitor the
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3.6 Aids to program management
Dependency diagrams
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3.6 Aids to program management
Dependency diagrams (Example)
B Corporate image design
A System
study/design C Build commonsystems F Data migration
G Implement corporate interface
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3.6 Aids to program management
Delivery Planning
The creation of a delivery dependency diagram would
typically be a precursor to more detailed program planning. As part of this planning, tranches of project could be defined.
A tranche is a group of projects that will deliver their products
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3.6 Aids to program management
Delivery Planning
Project A
Project C
Project D
Project B
Project D
Project E
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3.7 Benefits Management
Benefit Management is an attempt to remedy this. It encompasses the identification, optimization and tracking of the expected benefits from a business change in order to ensure that expected benefits from a business change in order to ensure that they are actually achieved.
• Defined the expected benefits from the program
• Analyze the balance between costs and benefits
• Plan how the benefits will be achieved and measured
• Allocate responsibilities for the successful delivery of the benefits
• Allocate responsibilities for the successful delivery of the benefits
Project Evaluation
3.7 Benefits Management
Benefits can be of many different types, including:
Mandatory compliance
Mandatory compliance
Quality of service
Productivity
More motivated workforce
Internal management benefits
Risk reduction
Economy
Revenue enhancement/acceleration
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3.7 Benefits Management
Quantifying benefits
Quantified and valued
Quantified and valued
Quantified but not valued
Project Evaluation
Project Evaluation
Overview of Feasibility
• A systems request must pass several
tests, called a
feasibility study
, to see
tests, called a
feasibility study
, to see
Project Evaluation
•
Economic Feasibility
–
Total cost of ownership (TCO)
Overview of Feasibility
–
Total cost of ownership (TCO)
– Tangible benefits
– Intangible benefits
– Tangible Costs
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•
Economic Feasibility
Overview of Feasibility
Cost-benefit Analysis
Cost-benefit Analysis
Net Profit
Payback Period
Return on Investment
Net Present Value
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•
Technical Feasibility
–
Technical feasibility
refers to technical
resources needed to develop, purchase,
Overview of Feasibility
resources needed to develop, purchase,
install, or operate the system
• New Technology
• Existing Technology
Project Evaluation
Overview of Feasibility
•
Operational Feasibility
–
Operational feasibility
means that a
proposed system will be used effectively
proposed system will be used effectively
after it has been developed
• Performance
• Information
• Economy
• Control
• Efficiency
• Efficiency
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3.8 Evaluation of individual projects
Three major factors will need to be considered in the evaluation of potential projects:
evaluation of potential projects:
Technical feasibility
The balance of costs and benefits
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3.9 Technical assessment
• Evaluating the required functionality against the hardware • Evaluating the required functionality against the hardware
and software available. • The Constraints
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3.4 Cost-benefit Analysis
The standard way of evaluating the economic benefits of any project is to carry out a cost-benefit analysis, which consists of two steps:
Identifying and estimating all of the costs and benefits of carrying out the project and operating the system.
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3.4 Cost-benefit Analysis
Most direct costs are easy to identify and measure in monetary terms.
Development costs
Setup costs
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3.10 Cost-benefit Analysis
Benefits may be categorized as follows:
Direct benefits
Assessable indirect benefits
Intangible benefits
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3.11 Cash flow forecasting
In c o m e In c o m e E x p e n d it u re Time
Typical product life cycle cash flow
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3.11 Cash flow forecasting
Year Project 1 Project 2 Project 3 Project 4
0 -100,000 -1,000,000 -100,000 -120,000 0 -100,000 -1,000,000 -100,000 -120,000 1 10,000 200,000 30,000 30,000 2 10,000 200,000 30,000 30,000 3 10,000 200,000 30,000 30,000 4 20,000 200,000 30,000 30,000 5 100,000 300,000 30,000 75,000
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3.12 Cost-benefit evaluation techniques
How to calculate Net Profit?
Net Profit
= Total income
–
Total cost
Project 1 Project 2 Project 3 Project 4
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3.12 Cost-benefit evaluation techniques
How to calculate Payback Period?
Payback Period
Is the time taken to break even or pay back the initial investment.
0 1 2 -100,000 10,000 10,000 -100,000 -90,000 -80,000 Year Cash Flow Payback Period
Project 1 2
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3.12 Cost-benefit evaluation techniques
Return on Investment
The return on investment (ROI) also known as the accounting rate of The return on investment (ROI) also known as the accounting rate of return (ARR), provides a way of comparing the net profitability to the investment required.
100
investment
total
profit
annual
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3.12 Cost-benefit evaluation techniques
Net Present Value (NPV)
NPV is a project evaluation technique that takes into
NPV is a project evaluation technique that takes into account the profitability of a project and the timing of the cash flows that are produced. It does so by discounting future cash flows by a percentage known as the discount rate. This is based on the view that receiving $100 today is better than having to wait until next year to receive it, because the $100 next year is worth less than $100 now.
tProject Evaluation
3.12 Cost-benefit evaluation techniques
Table 3.4: Applying the discount factors to project 1
Cash flow Discount factor Discount cash flow
Year Cash flow Discount factor Discount cash flow
(10%)
-100,000 1.0000 -100,000
10,000 0.9091 9,091
10,000 0.8264 8,264
10,000 0.7513 7,513
20,000 0.6830 13,660
100,000 0.6209 62,090
Year 0 1 2 3 4 5
50,000 NPV: 618
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3.12 Cost-benefit evaluation techniques
Internal rate of return
IRR attemps to provide a profitability measure as a percentage return IRR attemps to provide a profitability measure as a percentage return that is directly comparable with interest rates. It is a convenient and useful
measure of the value of a project in that it is a single percentage figure that may be directly compared with rates of return on other projects or interest rates
quoted elsewhere.
8,000
8 10 12
0
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3.12 Cost-benefit evaluation techniques
• A total evaluation must also take into account the problems of funding the cash flows.
• While a project’s IRR might indicate a profitable project, future earnings from a project might be far less reliable than
earnings from, say, investing with a bank.
Project Evaluation
3.13 Risk evaluation
Risk identification and ranking
• Construct a project risk matrix utilizing a checklist of possible risks and
• Construct a project risk matrix utilizing a checklist of possible risks and
to classify each risk according to its relative importance and likelihood.
• Risk classification:
High (H)
Medium (M)
Low (L)
exceedingly unlikely (-)
Project Evaluation
3.13 Risk evaluation
Risk identification and ranking
Table 3.7 A fragment of a basic risk matrix
Risk Importance Likelihood
Software never completed or delivered H
-Project cancelled after design stage H
-Software delivered late M M
Development budget exceeded <= 20% L M
Development budget exceeded <= 20% L M
Development budget exceeded > 20% M L
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3.13 Risk evaluation
Risk and net present value
• Where a project is relatively risky it is common practice to use a • Where a project is relatively risky it is common practice to use a
higher discount rate to calculate NPV.
Project Evaluation
3.13 Risk evaluation
Cost-benefit analysis
• Evaluation of risk is to consider:
• Evaluation of risk is to consider:
• each possible outcome
• estimate the probability of its occurring and corresponding value of
Project Evaluation
3.13 Risk evaluation
Example 3.7:
Buyright, a software house, is considering developing a payroll application for use Buyright, a software house, is considering developing a payroll application for use academic institutions and is currently engaged in a cost-benefit analysis. Study of the market has shown that, if they can target it efficiently and no competing product become available, they will obtain a high level of sales generating an annual income $800,000. They estimate that there is 1 in 10 chance of this happening. However competitor might launch a competing application before their own launch date and then sales might generate only $100,000 per year. They estimate that there is a 30% chance of this happen. The most likely outcome, they believe, is somewhere between these two extremes – they will gain market lead by launching before any competing product become available and achieve an annual income of $650,000. Calculate the expected income?
income?
Project Evaluation
3.13 Risk evaluation
Risk profile analysis
• Involve varying each of the parameters that affect the project’s • Involve varying each of the parameters that affect the project’s
cost or benefits to ascertain how sensitive the project’s profitability is to each factor
• Sensitivity analysis
• Monte Carlo simulation
Project B Project C
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3.13 Risk evaluation
Using decision trees
Expansion
NPV
-100,000
0.2
D
Extend
Replace
No expansion
Expansion
75,000
250,000
0.2 0.8
0.2
No expansion -50,000
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3.13 Risk evaluation
Questions Amenda’s decision tree is selecting the extend or replace machines.
Project Evaluation
3.14 Conclusion
Projects must be evaluated on strategic, technical and economic grounds
Economic assessment involves the identification of all costs and income over the Economic assessment involves the identification of all costs and income over the
lifetime of the system, including its development and operation and checking that the total value of benefits exceeds total expenditure
Money received in the future is worth less than the same amount of money in
hand now, which may be invested to earn interest
The uncertainty surrounding estimates of future returns lowers their real value
measured now
Discounted cash flow techniques may be used to evaluate the present value of future cash flows taking account of interest rates and uncertainty
