Unit – II Presentation

Unit – 2 (Project Evaluation)

Project Evaluation

Projects must be evaluated based on strategic, technical and

economic grounds.The success of a project is built on the initial evaluation of

organizational and financial feasibility.Project managers must clearly justify the estimation of costs

implementation and approve the project.The strategic objectives combined with the outcomes of the

project.

1) Strategic AssessmentA programme management is where a portfolio of projects

all contribute common objective.

Eg:-

Maintenance work of clientsCustomer’s experience of the organization might be very

variable and inconsistent.A business objective might be consistent and uniform.

2) Technical AssessmentTechnical Assessment of a proposed system consists of

evaluating the required functionality against the h/w and s/w available.

A uniform and consistent hardware/software infrastructure

is likely to place limitations on the nature of technical

solutions.

A uniform and consistent infrastructure must be defined

by the organizational policy so that there are no limitations

raised.

3) Cost Benefit Analysis

An economic assessment of a proposed information system or software product is used to compare the expected costs of development and operation of the system.

Assessment focuses on whether the estimated income and other benefits exceed the estimated costs.

Two steps,

1) Identifying and estimating all of the costs and benefits of carrying out the project and operating the delivered application.

2) Expressing these costs and benefits in common units. Estimate costs include the developmental, setup

and operational costs involved in the process of the new system.

Categories of Costs

Costs can broadly classified into two groups,

1) Based on system

2) Based on benefits

Many costs are easy to identify and measure in monetary terms.

Costs categories are, Development costs Setup costs Operational costs

Benefits that are obtained when installing a new system can be classified as, Quantified and valued benefits Quantified but not valued benefits Identified but not easily valued.

4) Cash Flow ForecastingEstimating the overall costs and benefits of a project is the

forecasting.A cash flow forecast will indicate when expenditure and

income will take place.

Typical Product Life Cycle Cash Flow

Expenditures occur by means of staff wages during the development stages of the project.

At the same instance, unless income is received, expenses cannot be deferred.

Typical product life cycle cash flow

Income

Expenditure Time

Accurate cash flow forecasting is not easy.When estimating future cash flows, it is usual to ignore the

effects of inflation.Forecasts of inflation rates tend to be uncertain. If expenditure is increased due to inflation it is likely that

income will increase proportionately.

5) Cost Benefit Evaluation Techniques

Cost-benefit analysis is a set of practical procedures for guiding public expenditure decisions.

Project evaluation usually requires comparing costs and benefits from different time periods.

Cash flow forecasting can be compared for different projects based on same general methods defined,

Net profitPayback periodReturn on InvestmentNet Present Value Internal Rate of return

5.1) Net profitThe net profit of a project is the difference between the total

costs and the total income over the life of the project.Net profits do not involve the timing of the cash flows.Project incomes are returned only towards the end of the

project.

5.2) Payback periodThe payback period is the time taken to break even or pay

back the initial investment.The project with shortest payback period will be chosen on

the basis of an organization.

Minimize the time limit.The payback period is simple to calculate but sensitive to

forecasting errors.The limitation of the payback period is that it ignores the

overall profitability of the project.

Advantage Simple to calculate and is not particularly sensitive to

small forecasting errors.

Disadvantage It ignores the overall profitability of the project.

5.3) Return on InvestmentThe ROI also known as the accounting rate of return(ARR). It provides a way of comparing the net profitability to the

investment required.

Formula,

ROI=average annual profit/total investment*100

It is simple, easy to calculate measure of return on capital.

Example:-

The net profit of a project is Rs 30,000 and the total investment is Rs 1,00,000. Calculate the ROI if the total period is taken as 3 years.

ROI=average annual profit/total investment*100 30,000*1/3

= ------------------- *100

1,00,000

= 10%

5.4) Net present valueThe project evaluation technique that is determined by the

profitability of a project and the timing of each cash flows that are produced.

Formula,

Present value=value in year t/(1+r)t

Where ‘r’ – denotes the discount rate expressed as a

decimal value.

‘t’ – represents the number of years of future

cash flows.

Net present value can also be calculated by multiplying the cash flow by the appropriate discount factor.

NPV for project is obtained by summing the discounted values and discounting each cash flows.

The NPV for project is obtained by discounting each cash flow and summing the discounted values.

5.5) Internal rate of return

The IRR is calculated as that percentage discount rate that would produce an NPV of zero.

A spreadsheet or a small computer program can be used to calculate the IRR is a convenient and useful measure of value of a project.

The limitation of IRR is that it does not indicate the absolute size of the return value.

6) Risk Evaluation Risk is associated with almost every project. Risk can become an important factor when the project is

not able to meet its objectives. Every possible risk must be identified, analyzed and

minimized during the development of the software system.

6.1) Risk Identification and ranking Every projects evaluation involves risk handling issues. The project evaluation are used to identify the risks and

quantify their potential effects.

The importance and likelihood are classified as high, medium, low.

The project risk matrix may be used as a way of evaluating projects or as a means of identifying and ranking the risks for a specific project.

6.2) Risk and net present valueA higher discount rate are used to calculate net present

value.Projects may be categorized as high, medium or low risk

using a scoring method and risk premiums designated for each category.

Risk matrix to determine Risk Level

Likelihood

Severity

Remote (1) Occasional (2) Frequent (3)

Minor (1) 1 2 3

Moderate (2) 2 4 6

Major (3) 3 6 9

Acceptability of Risk

Risk Score

Risk Level

Acceptability of Risk

Recommended Actions

<3Low Risk

AcceptableNo additional risk control measures required. To continue to monitor to ensure risk do not escalate to higher level.

3 – 4Medium Risk

Moderately Acceptable

Acceptable to carry out the work activity; however, task need to be reviewed to bring risk level to As Low As Reasonably Practicable. Interim control measures such as administrative controls can be implemented. Supervisory oversight required.

>4 High Risk

Not Acceptable

Job must not be carried out until risk level is brought to at least medium risk level.Risk controls should not be overly dependant on personal protective equipment. Controls measures should focus on Elimination, substitution and engineering controls.Immediate Management intervention required to ensure risk being brought down to at least medium level before work can be commenced.

6.3) Cost benefit analysisThe evaluation of risk are considered based on the possible

outcome and estimate its probability.The value of the project is then obtained by summing the

cost or benefit for each possible outcome weighted by its corresponding probability.

It is used in evaluation of large projects. It is most appropriate to evaluate a portfolio of projects to

determine the overall profitability.

6.4) Risk profile analysisThe construction of risk profiles uses the sensitivity

analysis.

It evaluate the sensitivity of the project to each factor.

Sensitivity analysis vary each factor one at a time.

Sensitivity analysis identifies the factors that yields a

success to the project and decide about whether to carry on

with the project or lay off.

The simulation tool is used to find out the number of

possible chances of specific project.

The main activities of the Risk Paradigm are,

Identify

Analyze

Plan

Track

Control

Communicate

6.5) Using decision treesDecision trees is a tool which provides evaluation of

project’s expected outcomes and choosing between the alternative strategies.

The analysis of a decision tree consists of evaluating the expected benefit of taking each path from a decision point.

The expected value of each path is determined by the sum of the value of each possible outcome multiplied by its probability of occurrence.

Advantage It will give a precise idea of modeling and analyzing the

problems in the project.

Decision trees

NPV

Expansion 0.2 -100,000

Extend No expansion 0.8 75,000

Replace Expansion 0.2 250,000

No expansion 0.8 -50,000

Decision tree