Project Management: "If You Have Pride in Your Organization, You Can Get Your People To Do Anything" JOE PATERNO 1976

Project Management
Project Management
If you have pride in your organization, you can get your people to
do anything JOE PATERNO 1976
Project Management
Projects Introduction
A project is a problem
scheduled for solution.
J M Juran
Project Management
A project is a series of
activities
and tasks with a specified
objective, starting and
ending
dates and resources.
3
Project Management
Project management is the process of project
Planning and implementation to achieve:
The specified goals and objectives,

At the desired performance or technology
level,
Within the time and cost constraints,
While utilizing the allocated resources.
4
Project Management
Elements of Project Management:
Planning
Deciding what to do
Scheduling
Deciding when to do it
Controlling
Assuring that the desired results are
obtained
5
Project Management
Objectives:
This section should help you
understand:
Project justification and
prioritization techniques
Project planning and estimation
Monitoring and measuring project
activity
Project documentation and related

procedures
6
Project Management
1.
Project Justification & Prioritization
Projects Justification &

Prioritization
Justification and prioritization of projects is based

upon the following methods:
Benefit-Cost Analysis
Return on assets (ROA)

Return on investment (ROI)
Net present value (NPV)
Internal rate of return (IRR)
Payback period
Decision Analysis and Portfolio Analysis

7
Project Management
1. Project Justification & Prioritization
A. Benefit-Cost Analysis
Benefit-Cost Analysis
An estimate based on the projects

benefits and costs and the timings
Uses projects projected revenues,
costs and net cash flows
For approval of funds from top
management
To maximize returns and minimize risk
Benefits-to-cost ratio:
Sum ($) of all benefits anticipated
Sum ($) of all costs anticipated
Project Management
1. Benefit-Cost Analysis
ABC Hospitals Radiology Equipment

Project
Dr. XYZ is evaluating a new project for his ABC

Hospitals Radiology Equipment Project. He has
determined that the after-tax cash flows for the
project will be $10,000, $12,000, $15,000 and
$7,000 respectively for each of the years 1
through 5. The initial cash outlay will be $40,000.
Project Management
1. Return on Assets

Project
ABC Hospital
Balance Sheet
December 31, 2001
(in million of dollars)
Assets
Liabilities
Current assets $ 20,000

Fixed assets. $ 20,000
Current liabilities..$10,000
Long term debt.$05,000
Owner's Equity..$25,000
Total... $ 40,000
Total$40,000
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Project Management
1. Return on Assets

Project
ABC Hospital
Income Statement
December 31, 2001
(in millions of dollars)
Net Sales
150,000
Cost of Goods Sold
082,000
Gross Profit
068,000
Operating Expenses
049,000
Earning Before Interest & Taxes
019,000
$
$
$
$
$
11
Project Management
2. Return on Assets
Return on Assets
A measure of the efficiency with which

management utilizes the assets of a project.
ROA =
Operating Income
Total Assets
For ABC Hospitals Project ROA= 19,000 = 0.48
40,000
ABC management has set ROA @ 60%
12
Project Management
2. Return on Investment
Return on Investment
The average annual net income from an

investment expressed as a percentage of the
average amount invested.
ROI =
Net Income
Investment
For ABC Hospitals Project ROI= 08,000 = 0. 25
40,000
ABC management has set ROI @ 35%
13
Project Management
3. Net Present Value (NPV)
Net Present Value

(NPV)
The net present value for a project is defined as

the difference between the present value of the
projects future cash flows and its initial
investment.
NPV
CF t
t
t=0 ( 1 + r )
n=number of periods, t=time period, r=per period cost of capital for
the project, and CFt is the cash flow in the time period t.
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Project Management
Net Present Value

(NPV)
NPV =
CF1
+
1
CF2
2
(1+k) (1+k)
CFn
n
(1+k)
ICO
NPV = $10,000 + $12,000 + $15,000 + $10,000 + $7,000

1
2
3 (1.13)
4
5
(1.13)
(1.13)
(1.13)
(1.13)
=$10,000(PVIF
)+$12,000(PVIF
)+
13%,1 )
13%,2
$15,000(PVIF
13%,3
13%,4 )+ $7,000 (PVIF

13%,5 ) - $40,000
+ $10,000(PVIF
15
Project Management
Net Present Value

(NPV)
NPV= $10,000(.885)+$12,000(.783)+
$15,000(.693)+
$10,000(.613)+$7,000(.543)-$40,000
NPV=
$3,801-
$8,850+$9,396+$10,395+$6,130+
$40,000
NPV= -$1,428
As NPV is negative, ABC Hospital will reject the
proposal.
16
Project Management
4. Internal Rate of Return
Internal Rate of Return
The Internal Rate of Return (IRR) is that discount

rate
(r) that equates the present value of net cash
flows to
The initial investment:
CF1
CF2
CFn
+
+
+
ICO =
n
1
2
(1+IRR) (1+IRR)
(1+IRR)
17
Project Management
$40,000 = $10,000(PVIF
)+$12,000(PVIF
)+$15,000(PVIF
10%,3
10%, 1
10%, 2
+
10%, 4
10%, 5
$10,000(PVIF
)+$7,000(PVIF
)
= $10,000(.909)+$12,000(.826)+$15,000(.751)+$10,000(.683)
+$7,000(.621)
=$9,090+$9,912+$11,265+$6,830+$4,347
=$41,444 (Rate is too low)
At 15% it comes out to be = $36,841 (Rate is too high)
18
Project Management
.10 $41,444
X
$1,444
.05
IRR
$40,000
$4,603
.15 $36,841
X
.05
X
=
$1,444
$4,603
=
0.157
IRR= .10+.0157= .1157 or 11.57 %
19
Project Management
The management of ABC Hospital has

determined that the hurdle rate for this
project is 13%.
Should this project be accepted?
No! The Hospital will receive 11.57 % for
each dollar invested in this project at a cost
of
13%. (IRR < Hurdle Rate)
20
Project Management
5. Payback Period
Payback Period (PBP)
It is the period of time required for

the
cumulative expected cash flows
from an
investment project to equal the
initial
cash outflow.
21
Project Management
5. Payback Period

1
10K(b)
40K
(a)
10K
2
10K
3
10K
20K
30K
Cumulative Inflows
4
10K
40K
PBP = a / b
= 40 /10
= 4 years
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Project Management
5. Payback Period
1
10K
10K
40K
(b)
2
12K
22K
3 (a)
15K
37K(c)
Cumulative Inflows
4
10K (d)
47K
5
7K
54K
PBP
= a + (b - c) / d
= 3 + (40 37) / 10
= 3.3 years
23
Project Management
6. Evaluation Summary
Evaluation Summary
Method
Result
Criteria
Decision
ROA
0.48
60%
Reject
ROI
0.25
35%
Reject
NPV
-$1,428
Positive
Reject
IRR
11.57%
13%
Reject
PBP
3.3 years
3.5 years
Accept
24
Project Management
B. Project Decision Analysis
Project Decision Analysis

Other Risk Factors Related to a
Project
Business Risk Factors Insurable Risks
Technology changes
Property damage
Competitors
Indirect
Material shortages
consequential loss
Health & Safety
Legal liability
Environmental
Personnel
25
Project Management
B. Project Decision Analysis
Project Decision Analysis

Project Risk Factor=
{(probability of
occurrence)} x
(consequences of risk)}
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Project Management
B. Project Portfolio Analysis
Project Portfolio Analysis

Metho
d
Project A Project B Project C Criteria
ROA
0.48
0.23
0.15
.50
ROI
0.25
.08
.30
.30
NPV
-$1,428
$10,428
-$500
$10,000
IRR
11.57%
9%
13%
13%
PBP
3.3 years
5 years
2.5 years
3 years
27
Project Management
2. Project Planning& Estimation
Project Planning &

Estimation
Project planning includes developing and
Analyzing the project timeline, required
Resources, and estimating of costs. The
various methods are:
Network rules
Program Evaluation and Review Technique (PERT)
Critical Path Method (CPM)
Gantt Charts
Work breakdown structures (WBS)
Estimation Techniques
28
Project Management
A. Network Rules
Network Rules
Before an activity may begin, all activities

preceding it must be completed.
Arrows imply logical precedence only. The
length and compass direction of the arrows
have mo meaning.
Any two events may be directly connected by
only one activity.
Events numbers must be unique.
The network must start at a single event, and
end at a single event.
29
Project Management
B. PERT
Program Evaluation & Review

Technique
In PERT activities are shown as a network of
precedence relationships using activity-onarrow network construction
Prerequisites:
Include all individual tasks
Sequence all the activities and tasks
Estimate time for each activity
Calculate the critical path and slack times
30
Project Management
B. PERT

Technique
Critical Path
The critical path is the sequence of tasks which
requires the greatest expected time.
Slack Time
The slack time (S) for and an even is the latest
date an event can occur or can be finished
without extending the project (TL) minus the
earliest date an event can occur (T E). For
events on a critical path, TL=TE, and S=0.
S= TL - TE
31
Project Management
B. PERT

Technique
Advantages of PERT
Identify interrelationships between
tasks and problem areas
Probability of deadlines is identified
Evaluation of project changes
A large project data can be simply
projected
32
Project Management
B. PERT

Technique
Disadvantages of PERT
Its complex nature increases

implementation
More data is required as network
inputs
33
Project Management
B. PERT
Program Evaluation & Review Technique

2
4
0
4
7
10
12
4
Pert Chart Example

34
Project Management
B. PERT
Program Evaluation & Review Technique

TASK
0
0-1
1-2
1-3
1-4
2-6
3-5
4-7
5-6
5-7
6-8
7-8
8-9
9-10
10
ACTIVITY
ISO 9001 Certification
Planning
Select Registrar
Write Procedures
Contact Consultant
Schedule Audit
Write Quality Manual
Consultant Advising
Send Manual to Auditor
Perform Training
Auditor Review Manual
Internal Audits
ISO Audit
Corrective Action
Certification
DURATION
Objective
4 weeks
4 weeks
8 weeks
3 weeks
6 weeks
4 weeks
12 weeks
1 week
6 weeks
4 weeks
2 weeks
1 week
3 weeks
Milestone
PERT Chart Tasks and Durations
35
Project Management
B. PERT

Technique
PATH
TOTAL TIME
0-1-2-6-8-9-10
22 weeks
0-1-3-5-6-8-9-10
25 weeks
0-1-3-5-7-8-9-10
28 weeks
0-1-4-7-8-9-10
25 weeks
Comparison of Possible Event Paths

36
Project Management
B. PERT

Technique
Calculating the Slack Time
What is the slack time for event 6?
S = TL TE = 20 17 = 3
37
Project Management
C. Critical Path Method

In PERT activities are shown as a network of
precedence relationships using activity-on-node
network construction.
Unique Features:
The emphasis is on activities
The time and cost factor for each activity is
considered
Only activities on the critical path are considered
Activities with the lowest crash cost (per
incremental time savings) are selected first
As an activity is crashed, it is possible for a new
critical path to develop
38
Project Management

Prerequisites:
Each activity has a normal cost and time
To crash means to apply more resources
to complete the activity in a shorter time
(time while cost )
The incremental cost per time saved to
crash each activity on CP is calculated
The activity with the lowest ICPTS
39
Project Management

B.4
J.4
E.6
H.1
A.4
C.8
D.3
F.4
I.6
K.2
L.1
M.3
G.12
CPM Example
40
Project Management

TASK
ACTIVITY
0
A
B
C
D
E
F
G
H
I
J
K
L
M
10
ISO 9001 Certifiction

Planning
Select Registrar
Write Procedures
Contact Consultant
Schedule Audit
Consultant Advising
Perform Training
Internal Audits
ISO Audit
Corrective Action
Certification
DURATION
COST
COST/
weeks
$
WEEK
Normal Crash Normal Crash CRASH
4
3
2000 3000
1000
4
3
1000 1200
200
8
6
12000 15000
1500
3
1
500
700
100
6
5
200
1000
800
4
3
800
1200
400
12
9
9600 14400
1600
1
1
100
100
x
6
4
9000 12000
1500
4
3
1000 1250
250
2
1
600
750
150
1
1
10000 10000
x
3
2
1600 2000
400
Milestone
Time-Cost Detail for CPM Example
41
Project Management

The cost and projects total duration if
done in a normal manner:
A-C-F-I-K-L-M
Time: 4+8+4+6+2+1+3 = 28 weeks
Cost: 2000+1000+12000+500+200+
800+9600+100+9000+1000+
600+10000+1600 = $ 48,400
42
Project Management

To complete the project in 27 weeks:
Crash activity K at $150/week. So the
cost to $48,550 and duration to 27
weeks
To further reduce the project to 26 weeks:
Next crash activity F or M @ $400/week,
the cost will to $48,950
43
Project Management

TASK
K
F
M
A
C
D
I
J
B
10
G
H
L
10
Sequence of
Crash Activities
ISO 9001 Certification
Normal
Internal Audits
Corrective Action
Planning
Write Procedures
Contact Consultant
Perform Training
Select Registrar
Schedule Audit
Consultant Advising
ISO Audit
Certification
Total
COST
Duration
$
WK
SAVE Normal Crash
28
0
27
1
600
750
26
1
800
1200
25
1
1600 2000
24
1
2000 3000
22
2
12000 15000
22
0
500
700
20
2
9000 12000
20
0
1000 1250
20
0
1000 1200
20
0
200
1000
20
0
9600 14400
20
0
100
100
20
0
10000 10000
Milestone
Priority Arrangement of CPM Activities
Total
Cost
$
48400
48550
48950
49350
50350
53350
53550
56550
56800
57000
57800
62600
62600
62600
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Project Management

The next activity to be crashed is A
at the
cost of $1,000/week. After task C is
crashed, there are two critical paths,
A-C-F-I-K-L-M and A-D-G-K-L-M, each
23 weeks long. Both D and I must be
crashed to shorten the critical path.
45
Project Management

B.4
J.4
E.6
H.1
A.3
C.6
D.3
F.3
I.6
K.1
L.1
M.3
G.12
1.
Crash K by 1 week = 27 weeks
2.
Crash F by 1 week = 26 weeks
3.
Crash A by 1 week = 25 weeks
4.
Crash C by 2 weeks = 23 weeks

46
Project Management

B.4
J.3
E.6
H.1
A.3
C.6
D.0
F.3
I.3
K.1
L.1
M.3
G.12
After task I is crashed, there are four critical paths, each 20

weeks long:
A-B-E-J-L-M
A-C-F-H-J-L-M
A-C-F-I-K-L-M
A-D-G-K-L-M
47
Project Management
CPM Time-Cost Trade-off

65000
Crashing activities beyond the

activity I, increases cost without
reduction in time
Cost ($)
60000
55000
50000
45000
18
20
22
24
26
Time (weeks)
28
30
48

Project Management: "If You Have Pride in Your Organization, You Can Get Your People To Do Anything" JOE PATERNO 1976

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Project Management

The specified goals and objectives,

Project documentation and related

Projects Justification &

Justification and prioritization of projects is based

Return on assets (ROA)

Decision Analysis and Portfolio Analysis

An estimate based on the projects

ABC Hospitals Radiology Equipment

Dr. XYZ is evaluating a new project for his ABC

ABC Hospitals Radiology Equipment

Current assets $ 20,000

ABC Hospitals Radiology Equipment

A measure of the efficiency with which

The average annual net income from an

Net Present Value

The net present value for a project is defined as

Net Present Value

NPV = $10,000 + $12,000 + $15,000 + $10,000 + $7,000

13%,4 )+ $7,000 (PVIF

Net Present Value

Internal Rate of Return

The Internal Rate of Return (IRR) is that discount

Internal Rate of Return

Internal Rate of Return

IRR= .10+.0157= .1157 or 11.57 %

Internal Rate of Return

The management of ABC Hospital has

Payback Period (PBP)

It is the period of time required for

Payback Period (PBP)

Payback Period (PBP)

Project Decision Analysis

Project Decision Analysis

Project Portfolio Analysis

Project A Project B Project C Criteria

Project Planning &

Before an activity may begin, all activities

Program Evaluation & Review

Program Evaluation & Review

Program Evaluation & Review

Program Evaluation & Review

Its complex nature increases

Program Evaluation & Review Technique

Pert Chart Example

Program Evaluation & Review Technique

PERT Chart Tasks and Durations

Program Evaluation & Review

Comparison of Possible Event Paths

Program Evaluation & Review

Critical Path Method (CPM)

Critical Path Method (CPM)

Critical Path Method (CPM)

Critical Path Method (CPM)

ISO 9001 Certifiction

Time-Cost Detail for CPM Example

Critical Path Method (CPM)

Critical Path Method (CPM)

Critical Path Method (CPM)

Priority Arrangement of CPM Activities

Critical Path Method (CPM)

Critical Path Method (CPM)

Crash K by 1 week = 27 weeks