Learning unit 2 lecture

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

THE INITIATION PHASE

Initiation Phase

Describe

Reasons for project to take place

Project estimations

Project selection

techniques

Risk analysis and

identification

Financial support

Project charter

Initial meeting

YES OR NO

Decline

Poor returns

Limited capacity

Six Reasons for a project to take place

Business needs

Market demands

Customer requests

Legal requirements

Technological advances

Social need

PROJECT ESTIMATIONS

Conceptual Estimate – Best Guess!!!

Page 58 example

Definitive Estimate – Meat on the bone!!!

More research

Page 58 example

PROJECT SELECTION TECHNIQUES - FINANCIAL

Financial selection methods probably most important selection technique.

We will look at three techniques:-

PAYBACK PERIOD

RETURN ON INVESTMENT

NET PRESENT VALUE

FINANCIAL SELECTION TECHNIQUES

METHOD OUTCOME UNIT OF

MEASUREMENT

Payback Period Measures time taken to

breakeven

Years and months

Return on Investment

(ROI)

Measures rate at which

investment grows

Percentage

Net Present Value (NPV) Measures overall

present day value of

present day and future

cashflows

Rand

Internal Rate of Return

(IRR)

Growth rate at which

NPV is equal to zero

Percentage

COMPARISON OF PROJECTS

PROJECT A PROJECT B

Initial investment R50000 Year Opening Balance

Return Yr 1 R10000 1 -R70000

Return Yr 2 R10000 2 -R40000

Return Yr 3 R20000 3 R10000

Return Yr 4 R30000 4 R10000

Return Yr 5 R25000 5 R60000

Return Yr 6 R60000 6 R120000

7 R145000

COMPARISON OF PROJECTS

PROJECT A

PROJECT B

Initial

investment

R50000 R70000

Opening

Balance

Yearly Return Opening

Balance

Yearly Return

Year 1 -R50000 R10000 -R70000 R30000

Year 2 -R40000 R10000 -R40000 R50000

Year 3 -R30000 R20000 R10000 R0

Year 4 -R10000 R30000 R10000 R50000

Year 5 R20000 R25000 R60000 R60000

Year 6 R45000 R60000 R120000 R25000

Year 7 R105000 R145000

CLASS EXERCISE

PROJECT C

PROJECT D

Initial

investment

R65000 R85000

Opening

Balance

Yearly Return Opening

Balance

Yearly Return

Year 1 20000 -R85000

Year 2 5000 -R65000

Year 3 10000 -R45000

Year 4 10000 -R20000

Year 5 35000 R15000

Year 6 10000 R45000

Year 7 R60000

FILL IN THE GAPS FOR PROJECT C AND PROJECT D

CLASS EXERCISE

PROJECT C

PROJECT D

Initial

investment

R65000 R85000

Opening

Balance

Yearly Return Opening

Balance

Yearly Return

Year 1 -R65000 R20000 -R85000 R20000

Year 2 -R45000 R5000 -R65000 R20000

Year 3 -R40000 R10000 -R45000 R25000

Year 4 -R30000 R10000 -R20000 R35000

Year 5 -R20000 R35000 R15000 R30000

Year 6 R15000 R10000 R45000 R15000

Year 7 R25000 R60000

CALCULATION OF PAYBACK TIME

Just year is not sufficient, need to calculate number of months as well

PAYBACK MONTH = OUTSTANDING BALANCE FOR PAYBACK YEAR X 12

REVENUE FOR PAYBAK YEAR

THIS FORMULA IS IMPORTANT: REMEMBER IT!!!!!

COMPARISON OF PROJECTS

PROJECT A

PROJECT B

Initial

investment

R50000 R70000

Opening

Balance

Yearly Return Opening

Balance

Yearly Return

Year 1 -R50000 R10000 -R70000 R30000

Year 2 -R40000 R10000 -R40000 R50000

Year 3 -R30000 R20000 R10000 R0

Year 4 -R10000 R30000 R10000 R50000

Year 5 R20000 R25000 R60000 R60000

Year 6 R45000 R60000 R120000 R25000

Year 7 R105000 R145000

Payback month A = (10000/30000) x 12 = 4 months

PAYBACK = 3 years 4 months

CLASS EXERCISE

PROJECT C

PROJECT D

Initial

investment

R65000 R85000

Opening

Balance

Yearly Return Opening

Balance

Yearly Return

Year 1 -R65000 R20000 -R85000 R20000

Year 2 -R45000 R5000 -R65000 R20000

Year 3 -R40000 R10000 -R45000 R25000

Year 4 -R30000 R10000 -R20000 R35000

Year 5 -R20000 R35000 R15000 R30000

Year 6 R15000 R10000 R45000 R15000

Year 7 R25000 R60000

CALCULATE PAYBACK (YR & MONTHS) FOR PROJECTS B,C & D

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?

MISTAKES IN PROJECT MANAGEMENT

Show “Titanic” film

RETURN ON INVESTMENT

PROJECT A

PROJECT B

Initial

investment

R50000 R70000

Opening

Balance

Yearly

Return

Opening

Balance

Yearly

Return

Year 1 -R50000 R10000 -R70000 R30000

Year 2 -R40000 R10000 -R40000 R50000

Year 3 -R30000 R20000 R10000 R0

Year 4 -R10000 R30000 R10000 R50000

Year 5 R20000 R25000 R60000 R60000

Year 6 R45000 R60000 R120000 R25000

R105000 R155000 R145000

PROJECT A

Step 1

Total Yearly returns

Step 2

Total Profit/Loss = yearly

returns – initial

investment

Step 3

Calculate average profit

= Total profit/ no years

RETURN ON INVESTMENT

Measures the rate of growth of an investment

ROI = AVERAGE PROFIT X 100

INITIAL INVESTMENT

ROI “A” = 17500 X 100

50000

= 35%

RETURN ON INVESTMENT

Now calculate the Return on Investment for projects B, C & D

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

NET PRESENT VALUE

Takes time value of money into consideration

INVEST TODAY GENERATE ONE YEAR

R100000 R105000 X

INTEREST RATE IS 9% SO WOULD NEED A MINIMUM OF

R109000 TO BREAKEVEN!!!

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

Discount factor

𝟏

𝟏 + 𝒊 𝒏

i = the interest rate

n = number of years

EXAMPLE

Interest rate = 9%

• Convert this to a decimal fraction

by dividing by 100 = 0.09

• Year 1 = 𝟏

𝟏+𝟎.𝟎𝟗 𝟏 = 0.917

• Year 2 = 𝟏

𝟏+𝟎.𝟎𝟗 𝟐 = 0.842

• Year 3 = 𝟏

𝟏+𝟎.𝟎𝟗 𝟑 = 0.772

• And so on for no of years

NET PRESENT VALUE

NET PRESENT VALUE

YEAR DISCOUNT

FACTOR

D

REVENUE

R

DISCOUNTED

REVENUE

D x R

COST DISCOUNTED

COST

0 1 R50000 R50000

1 0.917 R10000 R9170

2 0.842 R10000 R8420

3 0.772 R20000 R15440

4 0.708 R30000 R21240

5 0.650 R25000 R16250

6 0.596 R60000 R35760

TOTAL R155000 R106280 R50000 R50000

NPV = DISCOUNTED REVENUE – DISCOUNTED COST = R106280-R50000

= R56280

NET PRESENT VALUE

CLASS 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

NPV PROJECT B

PROJECT B

YEAR DISCOUNT

FACTOR REVENUE DISCOUNTED

REVENUE COST DISCOUNTED

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

NPV – PROJECT C

PROJECT C

YEAR DISCOUNT

FACTOR REVENUE DISCOUNTED

REVENUE COST DISCOUNTED

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

NPV – PROJECT D

PROJECT D

YEAR DISCOUNT

FACTOR REVENUE DISCOUNTED

REVENUE COST DISCOUNTED

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

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% R22700

TYPICALLY WE WOULD SELECT PROJECT WITH LOWEST PAYBACK TIME,

HIGHEST ROI, HIGHEST NPV

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

NON – FINANCIAL SELECTION TECHNIQUES

Four non-financial techniques:-

Production considerations

Marketing considerations

Personnel considerations

Administration and other considerations

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

WEIGHTED SCORING MODELS

PROJECT A

CRITERIA SCORE WEIGHT RELATIVE SCORE

FINANCIAL CONSIDERATIONS

PAYBACK 4 0.1 0.4

93% ROI 5 0.2 1

NPV 5 0.2 1

TOTAL 14

PRODUCTION CONSIDERATIONS

NO DISRUPTION 1 0.05 0.05

40% REQUIRED TECHNOLOGY

AVAILABLE 3 0.1 0.3

TOTAL 4

MARKETING CONSIDERATIONS

100% BENEFICIAL FOR FUTURE

WORK 5 0.2 1

TOTAL 5

PERSONNEL CONSIDERATIONS

EXTENSIVE TRAINING NOT

REQUIRED 1 0.05 0.05

20% NO EXCESSIVE STRESS TO

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%

(14/15)*100

(4/10)*100

(3.9/5)*100

4*0.1

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

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

40% REQUIRED TECHNOLOGY

AVAILABLE 1 0.1 0.1

TOTAL 4

MARKETING CONSIDERATIONS

60% BENEFICIAL FOR FUTURE

WORK 3 0.2 0.6

TOTAL 3

PERSONNEL CONSIDERATIONS

EXTENSIVE TRAINING NOT

REQUIRED 3 0.05 0.15

60% NO EXCESSIVE STRESS TO

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

TOTAL 3 62%

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

TOTAL 3

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

60% REQUIRED TECHNOLOGY

AVAILABLE 4 0.1 0.4

TOTAL 6

MARKETING CONSIDERATIONS

100% BENEFICIAL FOR FUTURE

WORK 5 0.2 1

TOTAL 5

PERSONNEL CONSIDERATIONS

EXTENSIVE TRAINING NOT

REQUIRED 1 0.05 0.05

40% NO EXCESSIVE STRESS TO

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%

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

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

90% REQUIRED TECHNOLOGY

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

70% NO EXCESSIVE STRESS TO

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%

PROJECT COMPARISON

PAYBACK ROI NPV WEIGHTED

SCORE

A 3 YRS 4

MTHS

35% R56280 78%

B 1 YR 10

MTHS

34.52% R88910 62%

C 4 YRS 7

MTHS

6.4% R1060 67%

D 3 YRS 7

MTHS

11.76% R22700 51%

TYPICALLY WE WOULD SELECT PROJECT WITH LOWEST PAYBACK TIME,

HIGHEST ROI, HIGHEST NPV, HIGHEST WEIGHTED SCORE

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

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

STAKEHOLDER ANALYSIS AND MANAGEMENT

WHAT 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)

EXAMPLES OF STAKEHOLDERS

Project sponsor

Client

Government

Employees

STAKEHOLDERS

PROJECT

ORGANISATION

COMPETITION

EMPLOYEES

ENVIRONMENTAL

GROUPS SOCIETY

CLIENT

GOVERNMENT

STAKEHOLDER MANAGEMENT

Stakeholders (of all types) must be managed!

Group Activity

Read case study on pages 73/74 of manual

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”

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

COST-BENEFIT ANALYSIS

A weighting scale approach to decision-making

where the disadvantages are listed on one side

of the balance and disadvantages on the other

See example p75

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

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

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 requirements

SEE TEMPLATE ON P77

INITIAL MEETING

• Usually between Project Manager, the client and

sometimes the sponsor