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Learning unit 2 lecture

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Slides from Introduction to Project Management LU2

Slides from Introduction to Project Management LU2

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  • 1. LEARNING UNIT OBJECTIVES Describe the initiation phase Describe reasons for project to take place Explain and make use of project estimations Explain and make use of project selection techniques: financial and non- financial Discuss feasibility in terms of identification and analysis of risk for Project Selection Purposes Discuss how to obtain financial support for projects Describe stakeholder management Create a project charter and preliminary scope document Describe the kick off meeting
  • 2. THE INITIATION PHASE Describe Reasons for Initial project to meeting take place Project Initiation Project charter Phase estimations Project Financial selection support techniques Risk analysis and identification
  • 3. YES OR NODeclinePoor returnsLimited capacitySix Reasons for a project to take place Business needs Market demands Customer requests Legal requirements Technological advances Social need
  • 4. PROJECT ESTIMATIONSConceptual Estimate – Best Guess!!!Page 58 exampleDefinitive Estimate – Meat on the bone!!!More researchPage 58 example
  • 5. PROJECT SELECTION TECHNIQUES - FINANCIALFinancial selection methods probably most important selection technique.We will look at three techniques:-PAYBACK PERIODRETURN ON INVESTMENTNET PRESENT VALUE
  • 6. FINANCIAL SELECTION TECHNIQUESMETHOD OUTCOME UNIT OF MEASUREMENTPayback Period Measures time taken to Years and months breakevenReturn on Investment Measures rate at which Percentage(ROI) investment growsNet Present Value (NPV) Measures overall Rand present day value of present day and future cashflowsInternal Rate of Return Growth rate at which Percentage(IRR) NPV is equal to zero
  • 7. COMPARISON OF PROJECTS PROJECT A PROJECT BInitial investment R50000 Year Opening BalanceReturn Yr 1 R10000 1 -R70000Return Yr 2 R10000 2 -R40000Return Yr 3 R20000 3 R10000Return Yr 4 R30000 4 R10000Return Yr 5 R25000 5 R60000Return Yr 6 R60000 6 R120000 7 R145000
  • 8. COMPARISON OF PROJECTS PROJECT A PROJECT BInitial R50000 R70000investment Opening Yearly Return Opening Yearly Return Balance BalanceYear 1 -R50000 R10000 -R70000 R30000Year 2 -R40000 R10000 -R40000 R50000Year 3 -R30000 R20000 R10000 R0Year 4 -R10000 R30000 R10000 R50000Year 5 R20000 R25000 R60000 R60000Year 6 R45000 R60000 R120000 R25000Year 7 R105000 R145000
  • 9. CLASS EXERCISE PROJECT C PROJECT DInitial R65000 R85000investment Opening Yearly Return Opening Yearly Return Balance BalanceYear 1 20000 -R85000Year 2 5000 -R65000Year 3 10000 -R45000Year 4 10000 -R20000Year 5 35000 R15000Year 6 10000 R45000Year 7 R60000FILL IN THE GAPS FOR PROJECT C AND PROJECT D
  • 10. CLASS EXERCISE PROJECT C PROJECT DInitial R65000 R85000investment Opening Yearly Return Opening Yearly Return Balance BalanceYear 1 -R65000 R20000 -R85000 R20000Year 2 -R45000 R5000 -R65000 R20000Year 3 -R40000 R10000 -R45000 R25000Year 4 -R30000 R10000 -R20000 R35000Year 5 -R20000 R35000 R15000 R30000Year 6 R15000 R10000 R45000 R15000Year 7 R25000 R60000
  • 11. CALCULATION OF PAYBACK TIMEJust year is not sufficient, need to calculate number of months as wellPAYBACK MONTH = OUTSTANDING BALANCE FOR PAYBACK YEAR X 12 REVENUE FOR PAYBAK YEARTHIS FORMULA IS IMPORTANT: REMEMBER IT!!!!!
  • 12. COMPARISON OF PROJECTS PROJECT A PROJECT BInitial R50000 R70000investment Opening Yearly Return Opening Yearly Return Balance BalanceYear 1 -R50000 R10000 -R70000 R30000Year 2 -R40000 R10000 -R40000 R50000Year 3 -R30000 R20000 R10000 R0Year 4 -R10000 R30000 R10000 R50000Year 5 R20000 R25000 R60000 R60000Year 6 R45000 R60000 R120000 R25000Year 7 R105000 R145000Payback month A = (10000/30000) x 12 = 4 monthsPAYBACK = 3 years 4 months
  • 13. CLASS EXERCISE PROJECT C PROJECT DInitial R65000 R85000investment Opening Yearly Return Opening Yearly Return Balance BalanceYear 1 -R65000 R20000 -R85000 R20000Year 2 -R45000 R5000 -R65000 R20000Year 3 -R40000 R10000 -R45000 R25000Year 4 -R30000 R10000 -R20000 R35000Year 5 -R20000 R35000 R15000 R30000Year 6 R15000 R10000 R45000 R15000Year 7 R25000 R60000CALCULATE PAYBACK (YR & MONTHS) FOR PROJECTS B,C & D
  • 14. PAYBACK EXERCISE PROJECT PAYBACK A 3 YRS & 4 MONTHS B 1 YR & 10 MONTHS C 4 YRS & 7 MONTHS D 3 YRS & 7 MONTHS WHICH PROJECT WOULD YOU SELECT AND WHY?
  • 15. MISTAKES IN PROJECT MANAGEMENTShow “Titanic” film
  • 16. RETURN ON INVESTMENTPROJECT A PROJECT A PROJECT BStep 1Total Yearly returns Initial R50000 R70000 investmentStep 2 Opening Yearly Opening YearlyTotal Profit/Loss = yearly Balance Return Balance Returnreturns – initial Year 1 -R50000 R10000 -R70000 R30000investment Year 2 -R40000 R10000 -R40000 R50000Step 3 Year 3 -R30000 R20000 R10000 R0Calculate average profit Year 4 -R10000 R30000 R10000 R50000= Total profit/ no years Year 5 R20000 R25000 R60000 R60000 Year 6 R45000 R60000 R120000 R25000 R105000 R155000 R145000
  • 17. RETURN ON INVESTMENTMeasures the rate of growth of an investmentROI = AVERAGE PROFIT X 100 INITIAL INVESTMENTROI “A” = 17500 X 100 50000 = 35%
  • 18. RETURN ON INVESTMENTNow calculate the Return on Investment for projects B, C & D
  • 19. PROJECT COMPARISON PAYBACK ROI A 3 YRS 4 MTHS 35% B 1 YR 10 MTHS 34.52% C 4 YRS 7 MTHS 6.4% D 3 YRS 7 MTHS 11.76%TYPICALLY WE WOULD SELECT PROJECT WITH HIGHEST ROI
  • 20. NET PRESENT VALUETakes time value of money into considerationINVEST TODAY GENERATE ONE YEARR100000 R105000 X INTEREST RATE IS 9% SO WOULD NEED A MINIMUM OF R109000 TO BREAKEVEN!!!
  • 21. NET PRESENT VALUE MEASURES VALUE OF INVESTMENT IN RAND ONLY CONSIDER PROJECTS WITH A NPV GREATER THAN 0 NEED A DISCOUNT FACTOR – PROJECT MANAGERS HAVE TO IDENTIFY THIS FOR THEIR PROJECT IN EXAM THIS FIGURE WILL BE GIVEN TO YOU
  • 22. NET PRESENT VALUE EXAMPLEDiscount factor Interest rate = 9% • Convert this to a decimal fraction by dividing by 100 = 0.09 𝟏 • Year 1 = 𝟏 = 0.917 𝟏 𝟏+𝟎.𝟎𝟗 𝟏+ 𝒊 𝒏 𝟏 • Year 2 = 𝟐 = 0.842i = the interest rate 𝟏+𝟎.𝟎𝟗n = number of years 𝟏 • Year 3 = 𝟑 = 0.772 𝟏+𝟎.𝟎𝟗 • And so on for no of years
  • 23. NET PRESENT VALUE YEAR DISCOUNT REVENUE DISCOUNTED COST DISCOUNTED FACTOR REVENUE COST D R DxR0 1 R50000 R500001 0.917 R10000 R91702 0.842 R10000 R84203 0.772 R20000 R154404 0.708 R30000 R212405 0.650 R25000 R162506 0.596 R60000 R35760 TOTAL R155000 R106280 R50000 R50000NPV = DISCOUNTED REVENUE – DISCOUNTED COST = R106280-R50000 = R56280
  • 24. NET PRESENT VALUECLASS EXERCISE PREPARE NPV TABLES FOR PROJECT B,C & D. ASSUME INTERST RATE IS 9% FOR ALL PROJECTS CALCULATE THE NPV FOR ALL 3 PROJECTS AND ADD TO YOUR COMPARISON TABLE OF PROJECTS
  • 25. NPV PROJECT BPROJECT B DISCOUNT DISCOUNTED DISCOUNTED YEAR FACTOR REVENUE REVENUE COST COST 0 1 70000 70000 1 0.917 30000 27510 2 0.842 50000 42100 3 0.772 0 0 4 0.708 50000 35400 5 0.65 60000 39000 6 0.596 25000 14900 TOTAL 215000 158910 70000 70000 NPV 88910
  • 26. NPV – PROJECT CPROJECT C DISCOUNT DISCOUNTED DISCOUNTED YEAR FACTOR REVENUE REVENUE COST COST 0 1 65000 65000 1 0.917 20000 18340 2 0.842 5000 4210 3 0.772 10000 7720 4 0.708 10000 7080 5 0.65 35000 22750 6 0.596 10000 5960 TOTAL 90000 66060 65000 65000 NPV 1060
  • 27. NPV – PROJECT DPROJECT D DISCOUNT DISCOUNTED DISCOUNTED YEAR FACTOR REVENUE REVENUE COST COST 0 1 85000 85000 1 0.917 20000 18340 2 0.842 20000 16840 3 0.772 25000 19300 4 0.708 35000 24780 5 0.65 30000 19500 6 0.596 15000 8940 TOTAL 145000 107700 85000 85000 NPV 22700
  • 28. PROJECT COMPARISON PAYBACK ROI NPV A 3 YRS 4 MTHS 35% R56280 B 1 YR 10 MTHS 34.52% R88910 C 4 YRS 7 MTHS 6.4% R1060 D 3 YRS 7 MTHS 11.76% R22700TYPICALLY WE WOULD SELECT PROJECT WITH LOWEST PAYBACK TIME,HIGHEST ROI, HIGHEST NPV
  • 29. INTERNAL RATE OF RETURN The rate at which the NPV is equal to zero. The project with the highest IIR should be selected You are not required to perform IIR calculations for this course
  • 30. NON – FINANCIAL SELECTION TECHNIQUESFour non-financial techniques:- Production considerations Marketing considerations Personnel considerations Administration and other considerations
  • 31. WEIGHTED SCORING MODELS Weight between 0 and 1 The more important the criteria the higher the weighting The total of the weights must add up to 1 Compile a scoring matrix for each of listed criteria Calculate a score per category and an overall score Different catergories can then be compared on an equal basis
  • 32. WEIGHTED SCORING MODELS PROJECT A(14/15)*100 CRITERIA SCORE WEIGHT RELATIVE SCORE 4*0.1 FINANCIAL CONSIDERATIONS PAYBACK 4 0.1 0.4 93% ROI 5 0.2 1 NPV 5 0.2 1 TOTAL 14(4/10)*100 PRODUCTION CONSIDERATIONS NO DISRUPTION 1 0.05 0.05 REQUIRED TECHNOLOGY 40% AVAILABLE 3 0.1 0.3 TOTAL 4 MARKETING CONSIDERATIONS BENEFICIAL FOR FUTURE 100% WORK 5 0.2 1 TOTAL 5 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT (3.9/5)*100 REQUIRED 1 0.05 0.05 NO EXCESSIVE STRESS TO 20% STAFF 1 0.05 0.05 TOTAL 2 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 1 0.05 0.05 20% 1 3.9 TOTAL 1 78%
  • 33. CLASS EXERCISE – WEIGHTED SCORING PROJECT B CRITERIA SCORE WEIGHT RELATIVE SCORE FINANCIAL CONSIDERATIONS PAYBACK 2 0.1 ROI 3 0.2 NPV 5 0.2 TOTAL 10 PRODUCTION CONSIDERATIONS NO DISRUPTION 3 0.05 REQUIRED TECHNOLOGY AVAILABLE 1 0.1 TOTAL 4 MARKETING CONSIDERATIONS BENEFICIAL FOR FUTURE WORK 3 0.2 TOTAL 3 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT REQUIRED 3 0.05 NO EXCESSIVE STRESS TO STAFF 3 0.05 TOTAL 6 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 3 0.05 1 TOTAL 3
  • 34. WEIGHTED SCORING – PROJECT B PROJECT B CRITERIA SCORE WEIGHT RELATIVE SCORE FINANCIAL CONSIDERATIONS PAYBACK 2 0.1 0.2 67% ROI 3 0.2 0.6 NPV 5 0.2 1 TOTAL 10 PRODUCTION CONSIDERATIONS NO DISRUPTION 3 0.05 0.15 REQUIRED TECHNOLOGY 40% AVAILABLE 1 0.1 0.1 TOTAL 4 MARKETING CONSIDERATIONS BENEFICIAL FOR FUTURE 60% WORK 3 0.2 0.6 TOTAL 3 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT REQUIRED 3 0.05 0.15 NO EXCESSIVE STRESS TO 60% STAFF 3 0.05 0.15 TOTAL 6 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 3 0.05 0.15 60% 1 3.1
  • 35. WEIGHTED SCORING – PROJECT C PROJECT C CRITERIA SCORE WEIGHT RELATIVE SCORE FINANCIAL CONSIDERATIONS PAYBACK 5 0.1 ROI 3 0.2 NPV 2 0.2 TOTAL 10 PRODUCTION CONSIDERATIONS NO DISRUPTION 2 0.05 REQUIRED TECHNOLOGY AVAILABLE 4 0.1 TOTAL 6 MARKETING CONSIDERATIONS BENEFICIAL FOR FUTURE WORK 5 0.2 TOTAL 5 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT REQUIRED 1 0.05 NO EXCESSIVE STRESS TO STAFF 3 0.05 TOTAL 4 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 3 0.05 1
  • 36. WEIGHTED SCORING – PROJECT C PROJECT C CRITERIA SCORE WEIGHT RELATIVE SCORE FINANCIAL CONSIDERATIONS PAYBACK 5 0.1 0.5 67% ROI 3 0.2 0.6 NPV 2 0.2 0.4 TOTAL 10 PRODUCTION CONSIDERATIONS NO DISRUPTION 2 0.05 0.1 REQUIRED TECHNOLOGY 60% AVAILABLE 4 0.1 0.4 TOTAL 6 MARKETING CONSIDERATIONS BENEFICIAL FOR FUTURE 100% WORK 5 0.2 1 TOTAL 5 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT REQUIRED 1 0.05 0.05 NO EXCESSIVE STRESS TO 40% STAFF 3 0.05 0.15 TOTAL 4 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 3 0.05 0.15 60% 1 3.35 TOTAL 3 67%
  • 37. WEIGHTED SCORING – PROJECT D PROJECT D CRITERIA SCORE WEIGHT RELATIVE SCORE FINANCIAL CONSIDERATIONS PAYBACK 2 0.1 ROI 2 0.2 NPV 2 0.2 TOTAL 6 PRODUCTION CONSIDERATIONS NO DISRUPTION 5 0.05 REQUIRED TECHNOLOGY AVAILABLE 4 0.1 TOTAL 9 MARKETING CONSIDERATIONS BENEFICIAL FOR FUTURE WORK 2 0.2 TOTAL 2 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT REQUIRED 4 0.05 NO EXCESSIVE STRESS TO STAFF 3 0.05 TOTAL 7 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 3 0.05 1 TOTAL 3
  • 38. WEIGHTED SCORING – PROJECT D PROJECT D CRITERIA SCORE WEIGHT RELATIVE SCORE FINANCIAL CONSIDERATIONS PAYBACK 2 0.1 0.2 40% ROI 2 0.2 0.4 NPV 2 0.2 0.4 TOTAL 6 PRODUCTION CONSIDERATIONS NO DISRUPTION 5 0.05 0.25 REQUIRED TECHNOLOGY 90% AVAILABLE 4 0.1 0.4 TOTAL 9 MARKETING CONSIDERATIONS 40% BENEFICIAL FOR FUTURE WORK 2 0.2 0.4 TOTAL 2 PERSONNEL CONSIDERATIONS EXTENSIVE TRAINING NOT REQUIRED 4 0.05 0.2 NO EXCESSIVE STRESS TO 70% STAFF 3 0.05 0.15 TOTAL 7 ADMINISTRATION AND OTHER CONSIDERATONS ADMIN SYSTEM WILL COPE 3 0.05 0.15 60% 1 2.55 TOTAL 3 51%
  • 39. PROJECT COMPARISON PAYBACK ROI NPV WEIGHTED SCOREA 3 YRS 4 35% R56280 78% MTHSB 1 YR 10 34.52% R88910 62% MTHSC 4 YRS 7 6.4% R1060 67% MTHSD 3 YRS 7 11.76% R22700 51% MTHS TYPICALLY WE WOULD SELECT PROJECT WITH LOWEST PAYBACK TIME, HIGHEST ROI, HIGHEST NPV, HIGHEST WEIGHTED SCORE
  • 40. FEASIBILITY• Identification and analysis of risk• Completed estimates may look promising but it is possible that the project selection team may require a FEASIBILITY STUDY• Must eliminate bias from feasibility study so research team should be separate to project team• Project team may have pre-conceived ideas that would influence the research• Feasibility study should give a lot more accurate estimates than conceptual estimate
  • 41. INTRODUCTION TO RISK MANAGEMENT• Will be looking at risk management in detail in LU3• Risks are negative events that can happen in the future• Cannot predict future with 100% accuracy• Can assume that past events will often repeat themselves (remember Titanic video!!)• If events occurred often in the past it is reasonable to assume they will happen again in the future• If event very negative (Olympia vs Titanic) Project Manager should carefully consider appropriate actions
  • 42. STAKEHOLDER ANALYSIS AND MANAGEMENTWHAT IS A STAKEHOLDER?“….people or organisations with vested interests in your project, who can either gain or lose as a result of your operations” (Heldman, 2005)
  • 43. EXAMPLES OF STAKEHOLDERS Project sponsor Client Government Employees
  • 44. STAKEHOLDERS ORGANISATION GOVERNMENT COMPETITION PROJECT CLIENT EMPLOYEES ENVIRONMENTAL SOCIETY GROUPS
  • 45. STAKEHOLDER MANAGEMENTStakeholders (of all types) must be managed!Group ActivityRead case study on pages 73/74 of manual
  • 46. STAKEHOLDER CONFLICT• Stakeholders usually have different expectations• Managing these expectations is stressful• “You can please some of the people all of the time, all of the people some of the time, but not all of the people all of the time”
  • 47. CONSTRAINTS• Internal constraints – limitations from within the company and project e.g. behaviour of project team. Project Manager should have control over these constraints.• External constraints – limitations from outside e.g. actions of environmental groups, supplier delivery schedules. Project Managers have little control over these constraints
  • 48. COST-BENEFIT ANALYSISA weighting scale approach to decision-makingwhere the disadvantages are listed on one sideof the balance and disadvantages on the otherSee example p75
  • 49. PROBLEMS WITH COST BENEFIT ANALYSIS• Cannot quantify intangible benefits• Costs can be calculated with a degree of accuracy• Scales may therefore be unfairly tipped to costs
  • 50. OBTAINING FINANCE• CORPORATE FINANCE – suitable for projects with financing needs less than R250 million• Relatively quick to obtain and is suitable for organisations that have a good financial position• PROJECT FINANCE –involves investments by a series of partners e.g. Government, investment houses.• Can be lengthy to obtain much larger amounts can be borrowed than with corporate finance
  • 51. PROJECT CHARTER• Official initiating document• Formally recognises projects existence• Authorises Project Manager to proceed with project• Makes resources available to project• Co-ordinates stakeholders inputs• Provides detailed overview of project requirementsSEE TEMPLATE ON P77
  • 52. INITIAL MEETING• Usually between Project Manager, the client and sometimes the sponsor