Introduction to Project Management Project Selection Models Project Selection under Uncertainity

1. Project Management
Chapter 1
Muhammad Yasir Saeed Qazi

2. What is Project?
• A unique set of coordinated activities, with a definite start and
finishing point, undertaken by an individual or organization to meet
specific objectives with defined, scheduled cost and performance
parameters.
• Temporary endeavors undertaken to create unique products, services
or results. (Project Management Institute, 2008)

3. Attributes
• Unique Purpose
• Temporary
• Require Resources, Often From Various Areas
• Should Have a Primary Sponsor and/or Customer
• Involve Uncertainty

4. Project Vs. Operations
Operations are repetitive, on going and produces
same results.

5. Project Vs. Program And Portfolio
• A project is a temporary endeavor undertaken by a company or
organization (such as the creation of a new product, service, or result)
• A program is a group of projects that are similar or related to one
another, and which are often managed and coordinated as a group
instead of independently
• A portfolio is a group of different programs and/or projects within the
same organization, which may be related or unrelated to one another
Put another way, projects fit within larger programs, which themselves
fit within portfolios.

6. Examples Of A Project, Program, And
Portfolio In The Construction Industry:
Project: Constructing a new office building
constructing a new office building involves a project manager, a team of
construction workers, and a specific budget and timeline to complete the
building.
Program: Developing a new mixed-use complex
a construction program could be developing a new mixed-use complex
that includes multiple projects such as design, construction, financing,
and leasing.

7. Cont'd
Portfolio: Managing a real estate development portfolio
For example, managing a real estate development portfolio could
involve multiple construction projects and programs, such as investing
in commercial and residential properties, managing land development,
and overseeing the construction of multiple buildings.

8. Management
The planning, organizing, leading and controlling of human and non
human resources to achieve the organization goals efficiently and
effectively.

9. Project Management
Project Management
The PMBOK Guide defines project management as the application of
knowledge, skills, tools and techniques to project activities to meet
project requirements.
In other words, it involves planning, organizing, monitoring and
controlling the project activities in order to accomplish the project
requirements.

10. Program Management
Program Management
Program Management is a method to manage related groups of projects.
(PMI)
PMI defines it as
“A group of related projects managed in a coordinated way to obtain
benefits and control not available from managing them individually.
Programs may include elements of related work outside scope of the
discrete projects in the program.” – PMBOK pg 368.

11. Project Management Institution (PMI)
Project management institution is an organization which provides
different standards that describe good practices, globally recognized
credentials that certify project management expertise, and resources for
professional development, networking and community.
PMI is one of the world’s largest not-for-profit membership associations
for the project management profession.

12. PMBOK
The Project Management Body of Knowledge (PMBOK) is a collection
of processes and knowledge areas generally accepted as best practice
within the project management discipline.

13. The Triple Constraints
Projects are traditionally described as having three constraints.
1. Quality: the standard of the outcomes to be achieved
2. Cost: the amount of money it will take to complete the project
3. Time: the amount of time available for the project

16. Type of Project Product of Project (Examples)
1.Administrative Installing a new accounting system
2.Construction A building or road
3.Computer Software Development A new computer program
4.Design of Plans Architectural or engineering plans
5.Equipment or System Installation A telephone system or IT system
6.Event or Relocation Olympiads or a move into a new building
7.Maintenance of Process Industries Petro-chemical plant or electric generating station
8.New Product Development A new drug or aerospace/defense product
9.Research A feasibility study or investigating a chemical

17. Different Components of Project
Management
Project Integration Management
Processes required to ensure that various elements of the project are
properly coordinated.
Example:
Let's say you're planning a surprise birthday party for your friend. You would
need to coordinate various aspects of the party, such as the guest list, the
location, the decorations, the food and drinks, and the entertainment. You
would create a plan that outlines all these elements and how they will come
together to create the perfect party. As you move forward with the planning,
you would monitor progress, take corrective action as necessary, and
communicate with other party planners to ensure everything runs smoothly.

19. Different Components of Project
Management
Project Integration Management
Processes required to ensure that various elements of the project are
properly coordinated.
Project Scope and Time Management
Processes required to ensure that the project includes all the work required
to complete it successfully in stipulated time.
Project Cost and Quality Management
Processes required to ensure quality and that the project is completed
within the approved budget.

20. Project Human Resource and Communication Management
Processes required to make the most effective use of the people involved in
the implementation of the project.
Project Risk Management
Processes required to focus on the future where uncertainty exists and
develop suitable plans of action to prevent potential issues from adversely
impacting the project.
Project Procurement Management
Includes the processes to purchase or acquire the products or services needed
from outside the project team to perform the work.

21. Why Project Management?
• Companies have experienced:
• Better customer relations
• Shorter overall delivery times
• Lower costs and higher profit margins
• Higher quality and reliability
• Higher worker morale

22. Why (NOT) Project Management?
• Companies have also experienced some negatives:
• Greater organizational complexity
• Increased likelihood of organizational policy violations
• Higher costs
• More management difficulties
• Low personnel utilization

23. Selecting Projects
Project selection is the process of evaluating individual projects or
groups of projects and then choosing to implement a set of them so that
the objectives of the parent organization are achieved.

24. Project Selection Conditions
These conditions vary widely from firm to firm, but several are quite
common:
(1) Is the project potentially profitable?
(2) Does the firm have, or can it easily acquire, the knowledge and skills to
carry out the project successfully?
(3) Does the organization possess building competencies
(4) Does the organization currently have the capacity to carry out the project
on its proposed schedule?
(5) In the case of R&D projects, if the project is technically successful, does
it meet all requirements to make it economically successful?

25. Methods of Selecting Projects
Two Fundamental Methods of Selecting Projects
1. Nonnumeric Selection Method
2. Numeric Selection Method

26. Nonnumeric Selection Method
• The Sacred Cow – The project is suggested by a senior or powerful
official in the organisation
• The Operating Necessity – A project that is required in order to protect
lives or property or to keep the company in operation
• Competitive Necessity – A project that is required in order to maintain
the company’s position in the marketplace

27. Numeric Selection Models

28. Learning Objectives
Understand the payback period (PBP) method of project evaluation and
selection, including its: (a) calculation; (b) acceptance criterion; (c)
advantages and disadvantages; and (d) focus on liquidity rather than
profitability.
Understand the three major discounted cash flow (DCF) methods of
project evaluation and selection – internal rate of return (IRR), net
present value (NPV), and profitability index (PI).
28

29. Capital budgeting
The process of identifying, analyzing, and
selecting investment projects whose returns
(cash flows) are expected to extend beyond
one year.
29

30. Project Evaluation and Selection:
Alternative Methods
1. Payback period (PBP)
2. Internal rate of return (IRR)
3. Net present value (NPV)
4. Profitability index (PI)
30

31. Proposed Project Data
Julie Miller is evaluating a new project for
her firm, Basket Wonders (BW). She has
determined that the after-tax cash flows for
the project will be $10,000; $12,000;
$15,000; $10,000; and $7,000, respectively,
for each of the Years 1 through 5. The initial
cash outlay will be $40,000.
31

32. Independent Project
For this project, assume that it is independent
of any other potential projects that Basket
Wonders may undertake.
Independent -- A project whose acceptance
(or rejection) does not prevent the acceptance
of other projects under consideration.
32

33. Payback Period
The payback period (PBP) of an investment project
tells us the number of years required to recover our
initial cash investment based on the project’s expected
cash flows.
33

34. Payback Period
PBP is the period of time required for the
cumulative expected cash flows from an
investment project to equal the initial cash
outflow.
0 1 2 3 4 5
-40 K 10 K 12 K 15 K 10 K 7 K

35. Steps in calculating NPV
1. Accumulate the cash flows occurring after the initial outlay in a “cumulative
inflows "column.
2. Look at the “cumulative inflows” column and note the last year (a whole figure)
for which the cumulative total does not exceed the initial outlay. (In our example,
that would be year 3.)
3. Compute the fraction of the following year’s cash inflow needed to “payback”
the initial cash outlay as follows: Take the initial outlay minus the cumulative total
from step 2, then divide this amount by the following year’s cash inflow. [For our
example, we have ($100,000 − $73,962)/$39,359 = 0.66.]
4. To get the payback period in years, take the whole figure determined in step 2,
and add to it the fraction

36. (c)
10 K 22 K 37 K 47 K 54 K
Payback Solution (#1)
PBP = a + ( b - c ) / d
= 3 + (40 - 37) / 10
= 3 + (3) / 10
= 3.3 Years
0 1 2 3 4 5
-40 K 10 K 12 K 15 K 10 K 7 K
Cumulative
Inflows
(a)
(-b) (d)

37. Payback Solution (#2)
PBP = 3 + ( 3K ) / 10K
= 3.3 Years
Note: Take absolute value of last negative
cumulative cash flow value.
Cumulative
Cash Flows
-40 K 10 K 12 K 15 K 10 K 7 K
0 1 2 3 4 5
-40 K -30 K -18 K -3 K 7 K 14 K

38. PBP Acceptance Criterion
Yes! The firm will receive back the initial
cash outlay in less than 3.5 years. [3.3 Years
< 3.5 Year Max.]
The management of Basket Wonders has set
a maximum PBP of 3.5 years for projects
of this type.
Should this project be accepted?

39. PBP Strengths and Weaknesses
Strengths:
• Easy to use and
understand
• Can be used as a
measure of
liquidity
• Easier to forecast ST
than LT flows
Weaknesses:
• Does not account
for TVM
• Does not consider
cash flows beyond
the PBP
• Cutoff period is
subjective

40. Internal Rate of Return (IRR)
IRR is the discount rate that equates the present
value of the future net cash flows from an
investment project with the project’s initial cash
outflow.
CF1 CF2 CFn
(1+IRR)1 (1+IRR)2 (1+IRR)n
+ . . . +
+
ICO =

41. $15,000 $10,000 $7,000
IRR Solution
$10,000 $12,000
(1+IRR)1 (1+IRR)2
Find the interest rate (IRR) that causes the
discounted cash flows to equal $40,000.
+ +
+
+
$40,000 =
(1+IRR)3 (1+IRR)4 (1+IRR)5

42. IRR Solution (Try 10%)
$40,000 = $10,000(PVIF10%,1) + $12,000(PVIF10%,2) +
$15,000(PVIF10%,3) + $10,000(PVIF10%,4) + $
7,000(PVIF10%,5)
$40,000 = $10,000(.909) + $12,000(.826) +
$15,000(.751) + $10,000(.683) +
$ 7,000(.621)
$40,000 = $9,090 + $9,912 + $11,265 +
$6,830 + $4,347
= $41,444 [Rate is too low!!]

43. IRR Solution (Try 15%)
$40,000 = $10,000(PVIF15%,1) + $12,000(PVIF15%,2) +
$15,000(PVIF15%,3) + $10,000(PVIF15%,4) + $
7,000(PVIF15%,5)
$40,000 = $10,000(.870) + $12,000(.756) +
$15,000(.658) + $10,000(.572) +
$ 7,000(.497)
$40,000 = $8,700 + $9,072 + $9,870 +
$5,720 + $3,479
= $36,841 [Rate is too high!!]

44. .10 $41,444
.05 IRR $40,000 $4,603
.15 $36,841
X $1,444
.05 $4,603
IRR Solution (Interpolate)
$1,444
X
=

45. .10 $41,444
.05 IRR $40,000 $4,603
.15 $36,841
X $1,444
.05 $4,603
IRR Solution (Interpolate)
$1,444
X
=

46. .10 $41,444
.05 IRR $40,000 $4,603
.15 $36,841
($1,444)(0.05)
$4,603
IRR Solution (Interpolate)
$1,444
X
X = X = .0157
IRR = .10 + .0157 = .1157 or 11.57%

47. Interpolated Discount Rate
Interpolated Discount Rate
Interpolated Discount Rate= iL +
(𝑖𝐻−𝑖𝐿)(𝑃𝑉𝐿−𝑃𝑉𝑌𝑇𝑀)
𝑃𝑉𝐿
−𝑃𝑉𝐻
= 0.1 +
(.0𝟓)(1444)
4603
=11.57%

48. IRR Acceptance Criterion
No! The firm will receive 11.57% for each
dollar invested in this project at a cost of
13%. [ IRR < Hurdle Rate ]
The management of Basket Wonders has
determined that the hurdle rate is 13% for
projects of this type.
Should this project be accepted?

49. Hurdle rate
Hurdle rate The minimum required rate of return on an investment in a
discounted cash flow analysis; the rate at which a project is acceptable.

50. IRR Strengths and Weaknesses
Strengths:
• Accounts for
TVM
• Considers all
cash flows
• Less
subjectivity
Weaknesses:
• Assumes all cash
flows reinvested at
the IRR
• Difficulties with
project rankings and
Multiple IRRs

51. Net Present Value (NPV)
NPV is the present value of an investment project’s net cash
flows minus the project’s initial cash outflow.
CF1 CF2 CFn
(1+k)1 (1+k)2 (1+k)n
+ . . . +
+ - ICO
NPV =

52. Basket Wonders has determined that the
appropriate discount rate (k) for this project is
13%.
$10,000 $7,000
NPV Solution
$10,000 $12,000 $15,000
(1.13)1 (1.13)2 (1.13)3
+ +
+ - $40,000
(1.13)4 (1.13)5
NPV = +

53. NPV Solution
NPV = $10,000(PVIF13%,1) + $12,000(PVIF13%,2) +
$15,000(PVIF13%,3) + $10,000(PVIF13%,4) +
$ 7,000(PVIF13%,5) - $40,000
NPV = $10,000(.885) + $12,000(.783) +
$15,000(.693) + $10,000(.613) + $
7,000(.543) - $40,000
NPV = $8,850 + $9,396 + $10,395 +
$6,130 + $3,801 - $40,000
= - $1,428

54. NPV Acceptance Criterion
No! The NPV is negative. This means that the
project is reducing shareholder wealth. [Reject
as NPV < 0 ]
The management of Basket Wonders has
determined that the required rate is 13%
for projects of this type.
Should this project be accepted?

55. NPV Strengths and Weaknesses
Strengths:
• Cash flows
assumed to be
reinvested at the
hurdle rate.
• Accounts for TVM.
• Considers all
cash flows.
Weaknesses:
• May not include
managerial
options embedded
in the project. See
Chapter 14.

56. Profitability Index (PI)
PI is the ratio of the present value of a
project’s future net cash flows to the
project’s initial cash outflow.
CF1 CF2 CFn
(1+k)1 (1+k)2 (1+k)n
+ . . . +
+ ICO
PI =
PI = 1 + [ NPV / ICO ]
<< OR >>
Method #2:
Method #1:

57. PI Acceptance Criterion
No! The PI is less than 1.00. This means
that the project is not profitable. [Reject as PI <
1.00 ]
PI = $38,572 / $40,000
= .9643 (Method #1, 13-34)
Should this project be accepted?

58. PI Strengths and Weaknesses
Strengths:
• Same as NPV
• Allows
comparison of
different scale
projects
Weaknesses:
• Same as NPV
• Provides only
relative profitability
• Potential Ranking
Problems

59. Evaluation Summary
Method Project Comparison Decision
PBP 3.3 3.5 Accept
IRR 11.47% 13% Reject
NPV -$1,424 $0 Reject
PI .96 1.00 Reject
Basket Wonders Independent Project

60. Decision Rules Under
Uncertainty

61. Introduction
• Uncertainty exist when the likelihood of this outcome and that
outcome can not be estimated, this is, when there is no rational basis
for even rough approximations of probability.
• We therefore fall back on “Principle of Choice” the selection from
which can be, and often is, a highly personal matter.
• The risk prone will go one way, the risk-averse another, and the risk-
neutral somewhere within the wide gap that often exists between the
two extreme

62. Criterion
• MAXIMAX
• MAXIMIN
• MINIMAX REGRET
• LAPLACE

63. Maximax (Optimistic)
This is the OPTIMISTIC type of criterion
In this criterion the decision maker does not want to miss the
opportunity to achieve the largest possible profit.
Procedure
1) Locate the maximum payoff values corresponding to each act
2) From among the maximums choose the highest value
3) The act corresponding to the highest value will be the decision

64. Example
Alternative State of Nature
Growing Economy
(S1)
Stable Economy
(S2)
Declining Economy
(S3)
Bonds (A1) 40 45 5
Stocks (A2) 70 30 -13
Mutual Funds (A3) 53 45 -5
1) Maximum payoff values corresponding to A1 = 45 i.e. maximum in 1st Row,
Maximum payoff values corresponding to A2 = 70 i.e. maximum in 2nd Row
Maximum payoff values corresponding to A3 = 53 i.e. maximum in 3rd Row
2) From among the maximums choose the highest value maximum payoff values out
of (45, 70, 53) = 70
3) Decision: Invest in Stocks

65. Maximin (Conservative and Pessimistic)
This is the PESSIMISTIC type of criterion. This is a conservative
approach.
Here the decision maker attempts in maximizing the minimum possible
profit Procedure
1) Locate the minimum payoff values corresponding to each act
2) From among the minimum choose the maximum value
3) The act corresponding to the maximum value will be the decision

66. Example
Alternative State of Nature
Growing Economy
(S1)
Stable Economy
(S2)
Declining Economy
(S3)
Bonds (A1) 40 45 5
Stocks (A2) 70 30 -13
Mutual Funds (A3) 53 45 -5
1) Minimum payoff values corresponding to A1 = 5 i.e. minimum in 1st Row,
Minimum payoff values corresponding to A2 = -13 i.e. minimum in 2nd Row
Minimum payoff values corresponding to A3 = -5 i.e. minimum in 3rd Row
2) From among the minimum choose the highest value maximum payoff values out
of (5, -13, -5) = 70
3) Decision: Invest in Bonds

67. Laplace
In this criteria it is assumed that all states of nature will occur with equal
probability.
Here the decision maker finds the average outcome for each act and
picks up the act corresponding to maximum value
Procedure
1) Find the average payoff values corresponding to each act
2) From among the averages choose the maximum value
3) The act corresponding to the maximum value will be the decision

68. Example
1. Average payoff values corresponding to act A1 =
40+45+05
3
= 90/3 = 30 i.e. average in 1st
row. Average payoff values corresponding to act A2 =
45+30+(−13)
3
= 62/3 = 20.66 i.e.
average in 2nd row. Average payoff values corresponding to act 𝐴3 =
53+45+(−5)
3
= 93/3
= 31 i.e. average in 3rd row
2. From among the averages choose the maximum value i.e. 31
3. Decision: Invest in Mutual Funds

69. Minimax Regret
In this criteria the decision maker identifies the maximum regret for
each act and selects the act for which maximum regret is minimum.
Procedure
1) Convert conditional profit matrix into regret matrix i.e. opportunity
loss table
2) Find the maximum values corresponding to each act
2) From among the averages choose the minimum value
3) The act corresponding to the minimum value will be the decision

70. Acts State of Nature
Growing Stable Declining
Bonds 40 45 5
Stocks 70 30 -13
Mutual
Funds
53 45 -5
Conditional Payoff Matrix
Acts State of Nature
Growing Stable Declining
Bonds 70-40 45-45 5-5
Stocks 70-70 45-30 5-(-13)
Mutual
Funds
70-53 45-45 5-(-5)
Opportunity Loss Table
Acts State of Nature
Growing Stable Declining
Bonds 30 0 0
Stocks 0 15 18
Mutual
Funds
17 0 10
Opportunity Loss Table

71. Example
Step 2) Maximum of A1=Max{30, 0, 0}=30 Maximum of A2=Max{0,15,18}=18 Maximum of
A3=Max{17, 0, 10}= 17
Step 3) From among the averages choose the minimum value i.e. min{30,18,17}=17
Step 4) Decision: Invest in Mutual Funds

72. Harwicz Rule
Actions Maximum (α) Minimum (α) Weighted Average
Bonds (A1) 45(0.5) 5(0.5) 25
Stocks (A2) 70(0.5) -13(0.5) 28.5
Mutual Funds (A3) 53(0.5) -5(0.5) 24