Project Management_1.pdf

4/15/2022 1
K J SOMAIYA COLLEGE OF ENGINEERING, MUMBAI-77
(CONSTITUENT COLLEGE OF SOMAIYA VIDYAVIHAR UNIVERSITY)
Presented by:
Prof. M. A. Palsodkar

4/15/2022 2
Why the emphasis on project management?
• Many tasks do not fit neatly into business-as-usual.
• Need to assign responsibility and authority for achievement of organizational
goals.
• Ensure meeting the project objectives within the allocated schedule & budget
o Communication
o Meetings
o Reviews
o Authorization
o Record Keeping
o Monitoring (testing)
o Interface Control
• Not for assigning blame (usually)

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Project
• A collection of linked activities, carried out in an organized manner,
with a clearly defined START POINT and END POINT to achieve some
specific results desired to satisfy the needs of the organization at the
current time
Project Management
• A dynamic process that utilizes the appropriate resources of the
organization in a controlled and structured manner, to achieve some
clearly defined objectives identified as needs.
• It is always conducted within a defined set of constraints

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PMI Definition
• “A temporary endeavor undertaken to create a unique product or service”
• (Source: A Guide to the Project Management Body of Knowledge, Project
Management Institute Standards Committee, p. 167, 1996)
• According to the Project Management Institute (PMI) , a project is any
work that happens only once, has a clear beginning and end, and is
intended to create a unique product or knowledge. It may involve only
one person, or thousands. It may last several days, or many years. It may
be undertaken by a single organization, or by an alliance of several
stakeholders. A project may be as simple as organizing a one-day event or
as complex as constructing a dam on a river.

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What is Project Management?
Project : A group of milestones or phases, activities or tasks that
support an effort to accomplish something
Management : is the process of Planning, Organizing, Controlling
and Measuring
Project management is a methodical approach to planning and guiding project
processes from start to finish. The processes are guided through five stages:
1) Initiation
2) planning
3) executing
4) controlling
5) closing.

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Project initiation
Project contracting
• It is an agreement between two parties.
• One party is the client and other party is the one provides
services or product.
• Contract gives complete detail of the project on paper.
Types of Projects
• Lump Sum or Fixed Price
• Maximum Guaranteed Price
• Cost Plus
• Price Per Unit

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Project Management principles
• Figure out what business you are in, and then mind your own business
• Understand the customer’s requirements and put them under version control
• Prepare a reasonable plan
• Build a good team with clear ownership
• Track project status and give it wide visibility
• Use Baseline Controls
• Write Important Stuff Down, Share it, and Save it
• If it hasn't been tested, it doesn't work
• Ensure Customer Satisfaction
• Be relentlessly pro-active.

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Legal aspects
• The most important thing
• It varies from country to country
• Differs from project to project.

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Characteristics of Projects
• Unique
• Specific Deliverable
• Specific Due Date
• Multidisciplinary
• Complex
• Conflict
• Part of Programs

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PROJECT MANAGEMENT VS. GENERAL
MANAGEMENT
• Students are expected to list down the differences and cross check from
book or Faculty member

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Skill Requirements for Effective Project Management
• Conflict Resolution
• Creativity and Flexibility
• Ability to Adjust to Change
• Good Planning
• Negotiation
o win-win versus win-lose

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THE THREE GOALS OF A PROJECT
• Performance, Cost, and Time Project Targets

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The Project Phases
• Phases that all projects go through from inception to completion
DESIGN
DEVELOPMENT
FABRICATION
INTEGRATION
TESTING
OPERATION

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The Design Phase
• Paper” study of all issues including the following:
o Define Objectives
o Understand Constraints
o Identify all subsystems & interfaces
o Design hardware
o Identify parts, costs & availability
o Determine personnel needs
o Establish schedule
o Develop plan to achieve objectives

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The Development Phase
• Detailed in-depth study including
oTest hardware concepts by prototyping
oFinalize designs
oPurchase long lead items
oEstablish interface controls
oComplete fabrication plan
oFinish integration & test plans
oComplete operations & data analysis plans

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Payload Construction Phases
• Parts procurement
• Fabrication
o Construct subsystems, test, fix, retest
• Integration
o Assemble subsystems, test, fix, retest
• Testing
o Payload qualification testing, fix, retest

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Operations & Analysis
• Interface with launch team
• Prepare payload for launch
• Monitor during flight
• Collect & analyze data

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THE LIFE CYCLES OF PROJECTS
• The Project Life Cycle ( S type)

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• An Alternate Project Life Cycle (J type)

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SELECTING PROJECTS (Nonnumeric Selection Methods)
• Methods that do not return a numeric value for a project that can be
compared with other projects
• These are really not “models” but rather justifications for projects
• Just because they are not true models does not make them all “bad”

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Types of Nonnumeric Models
• Sacred Cow
o A project, often suggested by top management, that has taken on a life of its own. It
continues, not due to any justification, but “just because.”
• Operating Necessity
o A project that is required in order to protect lives or property or to keep the company in
operation.
• Competitive Necessity
o A project that is required in order to maintain the company’s position in the marketplace.
• Product Line Extension
o Often, projects to expand a product line are evaluated on how well the new product
meshes with the existing product line rather than on overall benefits.
• Comparative Benefit
o Projects are subjectively rank ordered based on their perceived benefit to the company.

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SELECTING PROJECTS (Numeric Selection Methods)
• Numeric Selection Methods
• Financial Assessment Methods
• Models that look at costs and revenues
o Payback period
o Discounted cash flow (NPV)
o Internal rate of return (IRR)
o Profitability index
o Accounting Rate of Return (ARR)
• Scoring Methods
o unweighted 0-1 factor method
o weighted factor scoring method

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Non Discounting Criteria
Pay Back Period is the length of time to recover initial
cash outlay on the project. Shorter the payback period,
the more desirable the project. This criterion tends to
shield the project from the risk of future uncertainties
in the cash flows to certain extent.
4
000
,
25
$
000
,
100
$
Period
Payback
Flow
Cash
Annual
Cost
Project
Period
Payback



800000/400000=2 years

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Non Discounting Criteria
• Accounting Rate of Return is a measure of project profitability that
relates income to investment, both measured in accounting terms. It is
generally expressed as a ratio of Average Income after Tax to Initial
Investment.

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Drawbacks of Non discounted cash flow method
 It ignores time value of money. It treats all present and future cash flows
having same value.
 It overlooks cash flows beyond payback period and discriminates against
projects that generate substantial cash flows in later years.
 By focusing attention on capital recovery, it diverts attention from profitability.
 Though it measures project’s liquidity, it does not indicate firm’s liquidity.
 By ignoring cash flows beyond pay back period, the risks beyond pay back
period are also ignored
• 909 = present value
• 1000 = future value
• 10% = Discounting/Interest rate

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• PV= Rs. 1000
• I = 12%
• What is the future value after one year
• FV= 1120 = P + Interest accumulated in one year
• FV = 1000 + ( 1000*12/100) =1120
• If FV = Rs. 1000
• PV=?
• = x + (x*12/100)
• X= Rs. 893

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Discounted cash flow methods
• Net Present Value (NPV) is the sum of the present values of all cash flows
associated with the project. Future cash flows are discounted at a certain hurdle
rate to arrive at their present value. Higher NPV indicates a better proposal in case
the Initial Investments are similar.
• Benefit-Cost Analysis calculates the ratio of either Present Value of benefits to
the Initial Investment (Benefit Cost Ratio BCR) or the Net Present Value to Initial
Investment (Net Benefit Cost Ratio NBCR). The criterion is preferable to NPV
criteria for comparing proposals having widely differing initial investments.
• Internal Rate of Return (IRR) is the discount rate at which NPV of the project
is Zero. Higher IRR indicates better proposal irrespective of the amount of initial
investment.

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Discounted cash flow methods
 Future cash flows are discounted to the present value and therefore can
be compared to initial investment directly.
 All project cash flows for its entire life are considered in DCF
evaluation
 Both profitability of project during its operations and recovery of initial
investment are calculated in DCF analysis.

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Net Present Value
• The net present value of an income stream is the sum of the present
values of the individual amounts in the income stream. Each future
income amount in the stream is discounted, meaning that it is divided by
a number representing the opportunity cost of holding capital from now
(year 0) until the year when income is received or the outgo is spent. The
opportunity cost can either be how much one would have earned
investing the rupee someplace else, or how much interest one would have
had to pay if one borrowed a rupee.

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Net Present Value
• Future Value = Present Value × (1 + Interest Rate) n
• The present value of a future income amount is the amount that, if we
had it today, we could invest and have it grow to equal the future
income amount.
• Present Value = (Future Value) / (1 + Interest Rate) n

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Net Present Value
• The Discount Rate = The Interest Rate Used in Reverse
• When an interest rate is used in reverse like this, to calculate how much
you need now to have a certain amount later, economists conventionally
use the term discount rate rather than interest rate. The two terms mean
the same thing. A reason for using the term "discount rate" when you
calculate a present value is that you are taking a larger number, the future
value, and calculating from it a smaller number, the present value.
• Present Value = (Future Value) × (Discount Rate) n
• Discount rate = 1 / (1 + interest rate)
• When the discount rate goes up, present values go down. When the discount rate goes
down, present values go up

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Discounted Cash Flow

 


n
t
t
t
k
F
1
0
)
1
(
I
-
(project)
NPV
where
I0 = the initial investment
Ft = the net cash flow in period t
k = the interest rate
NPV = Net Present Value

4/15/2022 34
Net Present Value
• Three properties of the net present value of an income stream are:
1. Higher income amounts make the net present value higher. Lower
income amounts make the net present value lower.
2. If profits come sooner, the net present value is higher. If profits
come later, the net present value is lower.
3. Changing the discount rate changes the net present value. For an
investment with the common pattern of having costs early and
profits later, a higher discount rate makes the net present value
smaller.

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Net Present Value
• Since NPV method gives Net value of returns in Present Rupee terms,
NPV’s of different projects can be directly added. This helps in deciding
the projects that can be accepted amongst several contenders under
limited funds situation.
• Since NPV gives net value of returns in absolute Rupee terms, it cannot
be used to compare projects that require different initial investments.
• Ranking of projects by NPV method is influenced by nature of cash flow
patterns & discount rates. Projects with similar initial investments give
different rankings at different discount rates.
• The method also does not indicate the risk margin available over the
hurdle rate or the cost of capital.

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Internal Rate Of Return (IRR)
• The internal rate of return is the interest rate that makes the present value
of the investment's income stream -- its costs and payoffs -- add up to 0.
• The internal rate of return is a measure of the worth of an investment. If
the risks are equal investments with higher internal rates of return pay
better.
• IRR indicates margin of safety over cost of capital.
• Ranking of projects can be done for projects with different initial
investments.
• Ranking of projects does not change with change in cost of capital.
• If cash flows change sign more than once, there can be multiple values
for IRR

4/15/2022 37
Discounted Cash Flow

 


n
t
t
t
k
F
1
0
)
1
(
I
-
(project)
NPV
where
I0 = the initial investment
Ft = the net cash flow in period t
k = the required rate of return or hurdle rate
Make NPV ( Net Present Value) = 0 and find value of k by trial and
error.

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Three investment projects with net cash flows are shown. Decide which one of
them should be accepted using NPV and IPR Method. Assume rate of return as 12%
all values are in Rs.
Year Project ‘X’ Project ‘Y’ Project ‘Z’
0 20000 25000 30000
1 5000 7000 8000
2 10000 7000 15000
3 5000 7000 8000
4 2000 10000 4000
5 ------- 7000 --------
NPV -2441 2344 -2224
IRR 4.5% 15.29% 7.26%

 


n
t
t
t
k
F
1
0
)
1
(
I
-
(project)
NPV
NPV for Project X=
- 20000+(5000/(1+0.12))+(10000/(1.12*1.12))+(5000/(1.12*1.12*1.12))+(2000/(1.12*1.12*1.12*1.12))
IRR for Project X= 0 = -20000+(5000/(1+x)^1)+(10000/(1+x)^2)+(5000/(1+x)^3)+(2000/(1+x)^4)

4/15/2022 39
N P V I R R
NPV method finds the present value of future cash flows at
the given rate of discounting
IRR finds the rate of discounting at which the NPV becomes
zero.
Computation of NPV is comparatively simple. Computation of IRR is a complicated process as it involves
trial & error method with multiple computations to arrive at
the right value.
A project with positive value of NPV at the rate of
discounting equivalent to the WACC is considered
acceptable while the one with negative NPV is rejected.
A project with an IRR greater than WACC is considered
acceptable while the one with a lower IRR is rejected
Value of NPV depends on the rate of discounting used and
therefore, comparative ranking of projects may change as
discounting rate changes.
IRR is independent of the discounting rate and therefore can
give a direct comparison between projects.
NPVs of different projects can be added to find total
addition in value of the firm.
IRRs for different projects cannot follow the value
additivity principle.
NPV criterion can be used in case of varying cost of capital
i.e. rate of discounting from year to year
IRR criterion cannot be used in case rate of discounting
changes from year to year.

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Profitability Index
• Benefit cost ratio
• NPV divided by initial cash investment
• Ratios greater than 1.0 are good

4/15/2022 41
Advantages of Profitability Models
Advantages of Profitability Models
• Easy to use and understand
• Based on accounting data and forecasts
• Familiar and well understood
• Give a go/no-go indication
• Can be modified to include risk
Disadvantages of Profitability Models
• Ignore non-monetary factors
• Some ignore time value of money
• Discounting models (NPV, IRR) are biased to the short-term
• Payback models ignore cash flow after payback

4/15/2022 42
Unweighted factor model
• Each factor is weighted the same
• Less important factors are
weighted the same as important
ones
• Easy to compute
• Just total or average the scores
• Fees
• Campus placement
• Facilities available
• Reputation
• Cut off marks
• Autonomous status
• Nearness of railway station
• Faculty
• Co-curricular activity

4/15/2022 43
Scoring Models
Unweighted factor model
• Each factor is weighted the same
• Less important factors are weighted the same as
important ones
• Easy to compute
• Just total or average the scores

4/15/2022 44
Unweighted Factor Model Example

4/15/2022 45
The Weighted factor Model



n
j
j
ij
i w
s
S
1
where
Si = the total score of the ith project
sij = the score of the ith project on the jth criterion
wj = the weight or importance of the jth criterion
• Each factor is weighted relative to its importance
o Weighting allows important factors to stand out
• A good way to include non-numeric data in the analysis
• Factors need to sum to one
• All weights must be set up so higher values mean more desirable
• Small differences in totals are not meaningful

4/15/2022 46
Weighted Factor Model Example

4/15/2022 47
Project portfolio process (PPP)
Links projects directly to the goals and strategy of the organization, Means for
monitoring and controlling projects
• PPP Steps
1. Establish a project council
2. Identify project categories and criteria
3. Collect project data
4. Assess resource availability
5. Reduce the project and criteria set
6. Prioritize the projects within categories
7. Select projects to be funded and held in reserve
8. Implement the process

4/15/2022 48
Step 1: Establish a Project Council
• Senior management
• The project managers of major projects
• The head of the Project Management Office
• Particularly relevant general managers
• Those who can identify key opportunities and risks facing the
organization
• Anyone who can derail the PPP later on

4/15/2022 49
Step 2: Identify Project Categories and Criteria
1. Derivate projects
2. Platform projects
3. Breakthrough projects
4. R&D projects

4/15/2022 50
Step 3: Collect Project Data
• Assemble the data
• Document assumptions
• Screen out weaker projects
• The fewer projects that need to be compared and analyzed, the easier the
work

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Step 4: Assess Resource Availability
• Assess both internal and external resources
• Assess labor conservatively
• Timing is particularly important

4/15/2022 52
Step 5: Reduce the Project and Criteria Set
• Organization’s goals
• Have competence
• Market for offering
• How risky
• Potential partner
• Right resources
• Good fit
• Use strengths
• Synergistic
• Dominated by another
• Has slipped in desirability

4/15/2022 53
Step 6: Prioritize the Projects Within Categories
• Apply the scores and criterion weights
• Consider in terms of benefits first, resource costs second
• Summarize the returns from the projects

4/15/2022 54
Step 7: Select the Projects to be Funded and Held in
Reserve
• Determine the mix of projects across the categories
• Leave some resources free for new opportunities
• Allocate the categorized projects in rank order

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Step 8: Implement the Process
• Communicate results
• Repeat regularly
• Improve process

4/15/2022 56
Project Proposals
• The project proposal is essentially a project bid
• Putting together a project proposal requires a detailed analysis of the project
• Project proposals can take weeks or months to complete
• A more detailed analysis may result in not bidding on the project
Project Proposal Contents
• Cover letter
• Executive summary
• The technical approach
• The implementation plan
• The plan for logistic support and administration
• Past experience

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