Dr.

Rameez Khalid, PMP

Faculty, Department of Management
Institute of Business Administration, Karachi
 Project Managing Vs. Evaluation
• Project Management:
– Once the Project has been selected, we start managing it
– Management is accomplished in 5 process: Initiating,
Planning, Executing, Monitoring & Control and Closing
– As the lifecycle of the project starts we start managing it
– A number of Org. define its body of knowledge

• Project Evaluation/Appraisal:
– Help in making decision about which project to do & why.
– Accomplished before the project can be managed
– Mathematical tech. for finding the best alternative

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 Project or Capital Expenditure
Involves a current outlay of funds in the expectation
of a stream of benefits extending far into the future.
In accounting perspective, Capital Exp. is an exp.
that is shown as an Asset on the balance sheet.
The field of Project Evaluation and Feasibility
Analysis has the following fundamental issues:
Capital Investment – Importance and difficulties
Types of Capital Investments
Phases of Capital Budgeting
Levels of Decision Making
Facets of Project Analysis
Feasibility Study
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 Capital Investment
• Importance:
– Long-Term Effects
– Irreversibility
– Maximization of shareholder equity
– Substantial Outlays
• Difficulties:
– Measurement Problems
– Uncertainty
– Temporal Spread (10-20 years for industrial projects and
20-50 years for infrastructural projects)
– Poor alignment between strategy and budgeting
– Reverse Financial Engineering
– Inadequate Post-Audits
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 Capital Investment
• Capital investments may be classified in different
ways. System of classification vary from industry to
industry and firm to firm
• Types of Classifications:
– Physical, Monetary, or Intangible investments
– Strategic or Tactical investments
– Mandatory investments
– Replacement investments
– Expansion Investments
– Diversification Investments
– R&D Investments
– Miscellaneous Investments

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 Capital Budgeting
• Capital budgeting is a complex process that may be
divided into six broad phases.
• Phases:

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 Project Analysis
• The important facets of project analysis are:

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 Feasibility Study
Concerned with
the first four
phases of capital
budgeting and
involves all the
facets of project
analysis.

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 Project Evaluation & Elements of a Study

Collection of Mathematical techniques that simplify

comparison of alternatives on an economic basis
Most project decisions consider additional factors –
safety, environmental, political, public acceptance,
etc.
Fundamental terminology:
– Alternative -- stand-alone solution
– Cash flows -- estimated inflows (revenues) and outflows
(costs) for an alternative
– Evaluation criteria -- Basis used to select ‘best’
alternative; usually money (currency of the country)
– Time value of money -- Change in amount of money over
time
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 Important Questions
Some of the typical questions that can be addressed
by Project Evaluation:
• For Engineering Activities
– If a computer-vision sys. replaces the human inspector
in performing quality tests on an automobile welding
line, will operating costs decrease over a time horizon
of 5 years?
– Is it an economically wise decision to upgrade the
composite material production center of an airplane
factory in order to reduce costs by 20%?

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 Important Questions
Some of the typical questions that can be addressed by
Project Evaluation:
• For Public Sector Projects and Government Agencies
– How much new tax revenue does the city need to generate
to pay for an upgrade to the electric distribution sys.?
– Is it cost-effective for the state to cost-share with a
contractor to construct a new toll road?
• For Individuals
– What are post-graduate studies worth financially over my
professional career?
– Should I buy or lease my next car, or keep the one I have
now and pay off the loan?
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 Decisions and Estimates
• Techniques & models of project evaluation assist people
in making decisions.
• Numbers in an economic analysis are best estimates of
what is expected to occur.
• These estimates often involve 3 essential elements:
– cash flows, time of occurrence, and interest rates.
• The stochastic nature of estimates make the observed
value in the future differ from the estimate made now.

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 Decision Making Step 1

Procedure

Step 2

Step 3

Step 4
&5

Step 6 Step 7

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 Project Selection
Screening models help managers pick winners
from a pool of projects. Screening models are
numeric or nonnumeric and should have:

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 Screening & Selection Issues

• Risk – unpredictability to the firm

• Commercial – market potential
• Internal operating – changes in firm ops
• Additional – image, patent, fit, etc.

All models only partially reflect reality and

have both objective and subjective factors
imbedded

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 Project Screening Approaches

Checklist

Simple scoring models

Analytic hierarchy process

Profile models

Financial models

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 Checklist Model
• A checklist is a list of criteria applied to
possible projects.

Requires agreement on criteria

Assumes all criteria are equally important

• Checklists are valuable for recording

opinions and encouraging discussion

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 Checklist Model

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 Simple Scoring Models
• Each project receives a score that is the
weighted sum of its grade on a list of criteria.
• Scoring models require:
agreement on criteria
agreement on weights for criteria
a score assigned for each criteria

Score (Weight Score)

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 Analytic Hierarchy Process
The AHP is a four step process:
1. Construct a hierarchy of criteria and sub-criteria
2. Allocate weights to criteria

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 Analytic Hierarchy Process
3. Assign numerical values to evaluation dimensions
4. Scores determined by summing the products of
numeric evaluations and weights

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 Profile Models
• Show risk/return options for projects.
• Requires:
Criteria selection as axes
Rating each project on criteria

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Case: Project Selection & Screening at GE
GE Tollgate Process:

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Case: Project Selection & Screening at GE

GE Tollgate Review Process Flow Map:

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 Financial Models
• Based on the time value of money principal:
Payback period
Net present value
Internal rate of return
Options models

• All of these models use discounted cash flows

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 ROR and MARR
Minimum Attractive Rate of Return
• Cost of capital (COC) – interest
rate paid for funds to finance
projects
ROR
• MARR – Minimum ROR
needed for an alternative to be
justified and economically
acceptable. MARR COC.

• Always, for acceptable

projects:

ROR MARR > COC

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 Project Portfolio Management
The systematic process of selecting,
supporting, and managing the firm’s
collection of projects.
Portfolio management requires:
– decision making
– prioritization
– review
– realignment
– reprioritization

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 Project Portfolio Management
Keys to Successful Project Portfolio Management:
Flexible structure and freedom of communication
Low-cost environmental scanning
Time-paced transition

Problems in implementing Project Portfolio Mgmt:

Conservative technical communities
Out of sync projects and portfolios
Unpromising projects
Scarce resources

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 REFERENCES
•Engineering Economy
Leland Blank and Anthony Tarquin (6th
ed.-2005)

• Projects, Preparation, Appraisal,

Budgeting and Implementation
Prasanna Chandra (5th ed.-2003)

• Project Management: Achieving

Competitive Advantage
Jeffrey K. Pinto (Indian ed.-2011)

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