IT8075

SOFTWARE PROJECT MANAGEMENT

BASED ON SOFTWARE
PROJECT MANAGEMENT
Lecture slides for
5TH EDITION Batch: 2024
BY ROBERT HUGHES AND By Dr K Gopalakrishnan
Professor and Head
MIKE COTTERELL 2
Overview
• Project Definition
• Activities Covered by Software Project
Management
• Overview of Project Planning
• Stepwise Project Planning.
• Contract Management

3
 Outline of talk
In this introduction the main questions to be
addressed will be:

– What is software project management? Is it really

different from ‘ordinary’ project management?
– How do you know when a project has been
successful? For example, do the expectations of the
customer/client match those of the developers?
– Case Study: Titanic

4 4
Why is project management important?

• Large amounts of money are spent on ICT e.g. UK government in

2003-4 spent £2.3 billions on contracts for ICT and only £1.4
billions on road building
• Project often fail – Standish Group claim only a third of ICT
projects are successful. 82% were late and 43% exceeded their
budget.
• Poor project management a major factor in these failures

5
 What is a project?
Some dictionary definitions:
“A specific plan or design”
“A planned undertaking”
“A large undertaking e.g. a public works scheme”
Longmans dictionary
Definition:
A finite endeavor having specific start and completion date
undertaken to create a quantifiable deliverable.”
“Unique process, consisting of a set of coordinated and
controlled activities with start and finish dates, undertaken to
achieve an objective conforming to specific requirements,
including constraints of time, cost and resources”
Key points above are
• planned activities
• start and finish dates
• objectives 6 6
• constraints
 Jobs versus projects

‘Jobs’ – repetition of very well-defined and well understood

tasks with very little uncertainty
‘Exploration’ – e.g. finding a cure for cancer: the outcome is
very uncertain
‘Projects’ – in the middle!
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 Characteristics of projects
A task is more ‘project-like’ if it is:
• Non-routine
• Planned
• Aiming at a specific target
• Work carried out for a customer
• Involving several specialisms
• Made up of several different phases
• Constrained by time and resources
• Large and/or complex

8 8
Are software projects really different from
other projects?
Not really! …but…
• Invisibility – Progress of project
• Complexity – Cost wise
• Conformity – Human clients, organizations
• Flexibility - Strength
make software more problematic to build
than other engineered artefacts.
[Lecture1]

9 9
 Activities covered by project management

Feasibility study
Is project technically feasible and worthwhile from a business point
of view?
Planning
Only done if project is feasible
Execution
Implement plan, but plan may be changed as we go along
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Activities Covered By Software Project Management
5 Phases
Initiating/Defining State the problem(s) / goal(s)
Identify the objectives
Secure resources
Explore costs/benefits in feasibility study
Planning Estimate time and resources needed for completion
Write a detailed project plan
Start with the actual project work
Executing Identify and sequence activities
Identify the “critical path”
Commit resources to specific tasks
Controlling Establish reporting obligations
Create reporting tools
Compare actual progress with baseline
Initiate control interventions if necessary
Closing Finalize all obligations/commitments
Meet with stakeholders
Release project resources
Issue final report
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The software development life-cycle (ISO 12207)

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 ISO 12207 life-cycle
Requirements analysis
– Requirements elicitation: what does the client
need?
– Analysis: converting ‘customer-facing’
requirements into equivalents that developers
can understand
– Requirements will cover
• Functions
• Quality
• Resource constraints i.e. costs

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Requirement Specifications

• Functional requirements (What the system has to do to deliver

end product?)
– System analysis and design methods SADT
• Quality requirements (How it has to do?)
– Response time, user friendliness of the system
• Resource requirements (How much could be spent?)
– Tradeoff between resource and time

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 ISO 12207 life-cycle
• Architecture design
– Based on system requirements
– Defines components of system: hardware,
software, organizational
– Software requirements will come out of this
• Code and test
– Of individual components
• Integration
– Putting the components together

15 15
 ISO12207 continued
• Qualification testing
– Testing the system (not just the software)
• Installation
– The process of making the system operational
– Includes setting up standing data, setting system
parameters, installing on operational hardware
platforms, user training etc
• Acceptance support
– Including maintenance and enhancement

16 16
Stakeholders

These are people who have a stake or interest in the project.

In general, they could be users/clients or
developers/implementers
Objective owners
Stakeholders who control the financing, also own the project
– They also set the objectives
Different stakeholders have different motivation. Financial
interest - Development interest - Usage Interest
They could be:
1. Within the project team
2. Outside the project team, but within the same organization
3. Outside both the project team and17the organization 17
 Stakeholders and the exchange relationship

[Lecture2]
Figure 18.1 Stakeholders and the exchange relationship
Source: Charles W. L. Hill and Gareth R. Jones, Strategic Management: An Integrated Approach, Fifth Edition. Copyright © 2001 by Houghton Mifflin Company. Adapted with
permission
18
 Objectives
Informally, the objective of a project can be defined
by completing the statement:

The project will be regarded as a success

if………………………………..

Rather like post-conditions for the project

Focus on what will be put in place, rather than how
activities will be carried out

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 Setting objectives
• Answering the question ‘What do we have to
do to have a success?’
• Need for a project authority
– Sets the project scope
– Allocates/approves costs

• Could be one person - or a group

– Project Board
– Project Management Board
– Steering committee

20 20
 Goals/sub-objectives
These are steps along the way to achieving the
objective. Informally, these can be defined by
completing the sentence…

Objective X will be achieved

IF the following goals are all achieved
A……………
B……………
C…………… etc
Objectives identify the shared intentions
Objectives focus on the desired outcomes
Can be met in different ways 21 21
 Goals/sub-objectives continued
Often a goal can be allocated to an individual.
Individual may have the capability of achieving goal, but
not the objective on their own e.g.

Objective – user satisfaction with software product

Analyst goal – accurate requirements

Developer goal – software that is reliable

Project steering committee
The project manager runs the project on a day-to-day basis,
but regularly reports to the steering committee
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Objectives should be SMART
S– specific, that is, concrete and well-defined

M – measurable, that is, satisfaction of the

objective can be objectively judged

A– achievable, that is, it is within the power of the

individual or group concerned to meet the target

R– relevant, the objective must relevant to the true

purpose of the project

T– time constrained: there is defined point in

time by which the objective should be achieved
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 Measures of effectiveness
How do we know that the goal or objective has been
achieved?
By a practical test, that can be objectively assessed.
Mean time between failures – reliability
Project performance – Predictive measures
e.g. for user satisfaction with software product:
• Repeat business – they buy further products from us
• Number of complaints – if low etc

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 The business case
Benefits of delivered
project must outweigh
Benefits costs
Costs include:
Costs - Development
- Operation
Benefits
£ - Quantifiable – business
£ model
- Non-quantifiable
Development cost> benifits?
Features
Delivery date

25 25
 Project success/failure
• Degree to which objectives are met
scope (of deliverables)

time cost

In general if, for example, project is running out of time,

this can be recovered for by reducing scope or increasing
costs. Similarly costs and scope can be protected by
adjusting other corners of the ‘project triangle’.

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Differences in types of information

• Effectiveness: Doing the right thing

• Efficiency: Doing with best possible use of resources
• Software Measurements:
– Performance measures
• This determines the quality requirement of the proposed system
• Characteristics of the system
• Mean time between failures (reliability), time to learn (usability)
– Predictive measures
• During development indicates the likelihood of performance of
final system

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Other success criteria
These can relate to longer term, less directly
tangible assets
• Improved skill and knowledge
• Creation of assets that can be used on future
projects e.g. software libraries
• Improved customer relationships that lead to
repeat business
தூங்காமை கல்வி துணிவுமைமை இம்மூன்றும்
நீங்கா நிலனான் பவர்க்கு.
28
Plans, Methods and Methodologies

Context

Plan

+ start and end dates for each activity,

A way of working staffing, tools and materials etc

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 Plans, Methods and Methodologies
• Plan for activity
– Based on some idea of a method of work
– Start and end date, who will carry out, what tools and materials,
information will be needed
– A method is a manner, means, or process for
accomplishing something
• Testing a software

• Methodology: Group of methods or

techniques (OOD)

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 Some ways of categorizing projects
• Compulsory versus voluntary users
– Systems that staff must use. Ex Record a sale
- Use of systems is voluntary. Ex Computer games

• Information systems versus embedded systems

– Carry out office processes
– Control machines
• Outsourced projects
• Objective-based versus product-based
- Create product, the details of which have been
specified by the client
- Certain objectives which could be met in different
ways . Ask a specialist to recommend a solution

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Types of information systems (IS) projects
• Software development
• Package implementation
• System enhancement
• Consultancy and business analysis
• Systems migration
• Infrastructure implementation

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 1.Software development projects

• Similar to other ‘construction’ projects

• Main difficulty – intangibility of product
• Project managers need:
– Flexibility and adaptability
– Well-developed interpersonal and stakeholder management
skills

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 2.Package implementation projects
• Quicker and cheaper than building a system
• Main difficulties:
– Selecting the right package
– Tailoring to meet specific needs
– Integrating with other systems.
• Main challenges for the project manager:
– Managing series of sub-projects
– Ensuring suppliers live up to expectations
– Keeping users realistic about what they will get
– Trade-offs between business needs and package capabilities.

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3.System enhancement projects

• Often handled as ‘business as usual’ but can involve a

lot of work.
• Main issues for the project manager:
– Keeping existing systems operational while
enhancements are made
– Sharing technical staff time between enhancements and
day-to-day support
– Regression testing of enhancements.

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4. Consultancy and business analysis

• Main issues:
– Intangibility of the ‘product’
– Difficult to estimate realistically
– Shifting the scope of the project.

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5. Systems migration projects

• Moving existing system to new platform.

• Users judge success by lack of interruptions.
• May involve some retraining of users.
• May also involve some software development for
interfaces.

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 6. Infrastructure projects

• Installation of hardware and/or

• Communications networks
• Fitting out of computer suites
• General project management principles apply
• Specific issues to consider:
– Need to maintain ‘business as usual’
– Supplier management vital.

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Information and control in organizations

• Management information flows up the organizational

structure and the control flows down.
– Hierarchical flow. For ex:
Project team members will have team leader who allocated
work to them and the group leader will report to another
manager at higher level.
– Lateral flow. Ex: a programmer will receive specification
from an analyst and might seek clarification.

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Levels of decision making

• Decision is made based on adequate

information
– Strategic decision making
• About deciding objectives
– Tactical decision making
• To ensure that the objectives are fulfilled
– Operational decision making
• Related to day-to-day work in implementing the project

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What is management?
Setting objectives for a system and monitoring the
performance of the system P = planning
O = Organising
This involves the following activities: [POSDMICR] S = Staffing
D = Directing
• Planning – deciding what is to be done CO = Co ordinating
R = Reporting

• Organizing – making arrangements B = Budgetting.

• Staffing – selecting the right people for the job

Luther Gulick in
• Directing – giving instructions 1937

• Monitoring – checking on progress

• Controlling – taking action to remedy hold-ups
• Innovating – coming up with solutions when problems emerge
• Representing – liaising with clients, users, developers and
other stakeholders

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 Planning:
விமன வலியும்/ தன் வலியும்/ ைாறறான் வலியும்/
துமண வலியும்/ தூக்கிக் செயல் ( 471 )
The strength of the project, strength of our
own, strength of the opponents
and strength of the partners
should be weighed.

SWOT /SWOC Analysis

Organizing:
Organizing is the set of activities which are essential for
effective management.

Staffing is bringing in the people with required skills and getting the
work done through them.
குணம்நாடிக் குற்றமும் நாடி
Thus selected persons should be allowed அவற்றுள் ைிமகநாடி ைிக்க
to function on their own .
சகாளல்.
இதமன இதனால் இவன்முடிக்கும்
என்றாய்ந்து அதமன அவன்கண்
விைல். 42
Directing is guiding the subordinates to function according to
the organisation's plans.

Many management experts refer directing to leadership and decision

making.

எல்லார்க்கும் எல்லாம் நிகழ்பமவ எஞ்ஞான்றும்

வல்லறிதல் வவந்தன் சதாழில்.

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Problems with software project
• poor estimates
• lack of quality standards & measures
• lack of guidance about making
organizational decisions
• lack of techniques to make progress
visible
• poor role definition – who does what?
• incorrect success criteria
• inadequate specification work
• management ignorant of IT
• lack of knowledge of application area
• lack of standards
• lack of up-to-date information
documentation
• preceding activities not completed
on time – including late delivery of
equipment
• lack of communication between
users and technicians
• lack of communication between
users leading to dupliction of work
• changing statutory requirements
• changing software requirement
• deadline pressure
• lack of quality control
• remote management
• lack of training etc…
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Being fired for software project failures?
Most CIOs fired for missing budgets or time lines

In a brief survey that Janco Associates Inc. completed, they found that:

• 34 % of CIOs are fired for major application failure or mismanaging

change - missing budgets and or initiative time lines

• 29 % are fired for ignoring not being focused on how they operates. 28
percent get fired for ignoring customers

• 27 % get fired for key project never gets finished or goes too far over
budget

IT Toolkits Newsletter, August 27, 2009, Janco Associates Inc.

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Problems with software project

GAO Study of Government Software Development

Software Engineering Risk Analysis and Management, Robert Charette, 1999

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Management control

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 Management control
Data – the raw details
e.g. ‘6,000 documents processed at location X’

Information – the data is processed to produce

something that is meaningful and useful
e.g. ‘productivity is 100 documents a day’

Comparison with objectives/goals

e.g. we will not meet target of processing all documents by
31st March

48 48
Management control - continued
Modelling – working out the probable outcomes
of various decisions
e.g. if we employ two more staff at location X how
quickly can we get the documents processed?
Implementation – carrying out the remedial
actions that have been decided upon
Project plan – dynamic, constant adjustment

49 49
 Traditional Vs Modern Project Practices

• Planning Incremental Delivery

• Quality management
• Change management

50 50
 Example of projects
Projects
Producing an edition of a news paper
Putting a robot vehicle on Mars to search for signs of life
Getting married
Amending a financial computer system to deal with a
common European currency
A research project into what makes a good human-
computer interface
An investigation into the reason why a user has a
problem with a computer system
A second-year programming assignment for a computing
student
Writing an operating system for a new computer
Installing a new version of word processing package in
an organization
Software Projects
Putting a robot vehicle on Mars to search for
signs of life
Writing an operating system for a new computer
Amending a financial computer system to deal
with a common European currency
Installing a new version of word processing
package in an organization
An investigation into the reason why a user has
a problem with a computer system
Getting married
A research project into what makes a good
human-computer interface
Producing an edition of a news paper
A second-year programming assignment for a
computing
51 student 51
Software Project
Management
5th Edition Chapter 2
PROJECT
EVALUATION AND
PROGRAMME
MANAGEMENT

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PROJECT EVALUATION - OVERVIEW

• Business plan
• Project portfolio management
• Evaluation
– Strategic Assessment
– Technical Assessment
– Economic assessment
• Risk Evaluation
• Programmes
The business case
• Feasibility studies can also act as a ‘business
case’
• Provides a justification for starting the project
• Should show that the benefits of the project
will exceed development, implementation
and operational costs
• Needs to take account of business risks

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Contents of a business case
1. Introduction/ 5. The benefits
background 6. Outline implementation
2. The proposed project plan
3. The market 7. Costs
4. Organizational and 8. The financial case
operational 9. Risks
infrastructure 10. Management plan

55
Content of the business case

• Introduction/background: describes a problem

to be solved or an opportunity to be exploited
• The proposed project: a brief outline of the
project scope
• The market: the project could be to develop a
new product (e.g. a new computer game).
The likely demand for the product would
need to be assessed.

56
Content of the business case - continued

• Organizational and operational infrastructure:

How the organization would need to change.
This would be important where a new
information system application was being
introduced.
• Benefits These should be express in financial
terms where possible. In the end it is up to the
client to assess these – as they are going to pay
for the project.

57
Content of the business case - continued

• Outline implementation plan: how the project is

going to be implemented. This should consider
the disruption to an organization that a project
might cause.
• Costs: the implementation plan will supply
information to establish these
• Financial analysis: combines costs and benefit
data to establish value of project
• Risks: Estimation of costs, benefits and related
risks

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What is a Portfolio ?

A portfolio refers to a collection of investment tools such as

stocks, shares, mutual funds, bonds, cash and so on
depending on the investor’s income, budget and convenient
time frame.
Two types of Portfolio
1. Market Portfolio
2. Zero Investment Portfolio

1. Project portfolio definition

– Create a central record of all projects within an organization
– Must decide whether to have ALL projects in the repository
or, say, only ICT projects
– Note difference between new product development (NPD)
projects and renewal projects e.g. for process improvement

http://www.managementstudyguide.com/
59
 2.What is Portfolio Management ?
• Evaluating proposals for projects
• Assessing the risk involved with projects
• Deciding how to share resources between projects
• Taking account of dependencies between projects
• Removing duplication between projects
• Checking for gaps

The art of selecting the right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.

Portfolio management refers to managing an individual’s investments in the

form of bonds, shares, cash, mutual funds etc. so that he earns the maximum
profits within the stipulated time frame.

Portfolio management refers to managing money of an individual under the

expert guidance of portfolio managers.

In a layman’s language, the art of managing an individual’s investment is

called as portfolio management.

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Need for Portfolio Management
• best investment plan
• minimizes the risks
• provide customized investment solutions

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Types of Portfolio Management
Active Portfolio Management: in an active portfolio management
service, the portfolio managers are actively involved in buying and
selling of securities to ensure maximum profits to individuals.
Passive Portfolio Management: In a passive portfolio management, the
portfolio manager deals with a fixed portfolio designed to match the
current market scenario.
Discretionary Portfolio management services: In Discretionary
portfolio management services, an individual authorizes a portfolio
manager to take care of his financial needs on his behalf. The
individual issues money to the portfolio manager who in turn takes care
of all his investment needs, paper work, documentation, filing and so
on. In discretionary portfolio management, the portfolio manager has
full rights to take decisions on his client’s behalf.
Non-Discretionary Portfolio management services: In non discretionary
portfolio management services, the portfolio manager can merely
advise the client what is good and bad for him but the client reserves
full right to take his own decisions.

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3. Project portfolio optimization
Information gathered above can be used to achieve
better balance of projects e.g. some that are risky but
potentially very valuable balanced by less risky but less
valuable projects

You may want to allow some work to be done outside

the portfolio
e.g. quick fixes
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PROJECT EVALUATION

• Project evaluation is a step by step process of collecting,

recording and organizing information about

– Project results
– short - term outputs (immediate results of activities or
project deliverables)
– Long – term outputs (changes in behaviour, practice or
policy resulting from the result.
Why is project evaluation important?
Project evaluation is important for answering the following
questions-
- what progress has been made?
- were the desired outcomes achieved? Why?
- whether the project can be refined to achieve better
outcomes?
- do the project results justify the project inputs?

What are the challenges in monitoring and

evaluation?
- getting the commitment to do it.
- establishing base lines at the beginning of the project.
- identifying realistic quantitative and qualitative indicator.
- finding the time to do it and sticking to it.
- getting feedback from your stakeholders.
- reporting back to your stakeholders.
STRATEGIC ASSESSMENT
WHAT IS STRATEGIC PLANNING?
Strategic planning is defined as an organization’s process of
defining its strategy, or direction and making decisions on
allocating its resources to pursue this strategy, including its
capital and people
- it deals with:
- what do we do?
- for whom do we do it?
- how do we excel?
• STRATEGIC ASSESSMENT is the first criteria for project evaluation
– For evaluating and managing the projects, the individual projects
should be seen as components of a programme. Hence need to do
programme management.
Programme management:
• D.C. Ferns defined “a programme as a group of projects that
are managed in a co-ordinated way to gain benefits that would
not be possible were the projects to be managed
independently”.

• A programme in this context is a “collection of projects that all

contribute to the same overall organization goals”.

• Effective programme management requires that there is a well

defined programme goal and that all the organization’s
projects are selected and tuned to contribure to this goal”
• Evaluating of project depends on:
– How it contributes to programme goal.
– Its viability |capability of developing or useful].
– Timing.
– Resourcing.

• For successful strategic assessment, there should be a strategic

plan which defines:
– Organization’s objectives.
– Provides context for defining programme
– Provides context for defining programme goals.
– Provide context for accessing individual project.
• In large organization, programme management is taken care
by programme director and programme executive, rather than,
project manager, who will be responsible for the strategic
assessment of project.
• Any potential software system will form part of the user
organization’s overall information system and must be
evaluated within the context of existing information system
and the organization’s information strategy.

• If a well – defined information system does not exist then the

system development and the assessment of project proposals
will be based on a more “piece meal approach”.

• Piece meal approach is one in which each project being

individually early in its life cycle.
• Typical issues and questions to be considered during strategic
assessment
• Issue – 1: objectives:
– How will the proposed system contribute to the
organization’s stated objectives? How, for example, might it
contribute to an increase in market share?

• Issue – 2: is plan
– How does the proposed system fit in to the IS plan?
Which existing system (s) will it replace/interface with?
How will it interact with systems proposed for the later
development?
• Issue – 3: organization structure:
– What effect will the new system have on the existing
departmental and organization structure?
– For example, a new sales order processing system
overlap existing sales and stock control functions?
• Issue – 4: MIS:
– What information will the system provide and at what
levels in the organization? In what ways will it
complement or enhance existing management
information system?
• Issue – 5: personnel:
– In what way will the system proposed system affect
manning levels and the existing employee skill base?
What are the implications for the organization’s overall
policy on staff development.
• Issue – 6: image:
– What, if any, will be the effect on customer’s attitudes
towards the organization? Will the adoption of, say,
automated system conflict with the objectives of
providing a friendly service?
• Portfolio management
• Project Portfolio Management is a strategy to manage
multiple projects at the same time
– Strategic and operational assessment carried by an organization
on behalf of customer is called portfolio management [third
party developers]
– They make use of assessment of any proposed project
themselves.
– They ensure for consistency with the proposed strategic plan.
– They proposed project will form part of a portfolio of ongoing
and planned projects

• Selection of projects must take account of possible effects on other

projects in the portfolio( example: competition of resource) and the
overall portfolio profile (example: specialization versus
diversification).
Technical assessment

– It is the second criteria for evaluating the project.

– Technical assessment of a proposed system evaluates
functionality against available:
• Hardware
• Software
• Limitations
– Nature of solutions produced by strategic information
systems plan
– Cost of solution. Hence undergoes cost-benefit analysis.
Economic Assessment
COST BENEFIT ANALYSIS
• “Economic assessment” of a proposed information system.
• This is done by comparing the expected costs of development and
operation of the system with its benefits.
• Assessment is based on:
• Whether the estimated costs are executed by the estimated
income.
• And by other benefits
• For achieving benefit where there is scarce resources, projects will
be prioritized and resource are allocated effectively.
• The standard way of evaluating economic benefits of any project is
done by “cost benefit analysis”
Cost benefit analysis comprises of two steps:
• Step-1: identifying and estimating all of the costs and benefits
of carrying out the project.
• Development cost of system - salary and other
employment cost of staff
• Set-up costs - cost of implementation of system such as
hardware, file conversion, recruitment and staff training
• Operational cost of system- cost required to operate
system, after installation
• Benefits obtained by system.
• Example: sales order processing system which gives benefit
due to use of new system.
• Step-2: Expressing these costs and benefits in common units.
– Calculates net benefit.
– Net benefit = total benefit - total cost.
– (cost should be expressed in monetary terms).
Benefits
• Three categories of benefits:

• 1) Direct benefits: directly obtained benefit by making use

of/operating the system.
Example: reduction of salary bills, through the introduction of a
new , computerized system.

• 2) Assessable indirect benefits: these benefits are obtained due to

updation / upgrading the performance of current system. It is also
referred as “secondary benefits”.
Example: “use of user – friendly screen”, which promotes
reduction in errors, thus increases the benefit.
• Intangible benefits: these benefits are longer term, difficult to
quantify. It is also referred as “indirect benefits”.
Example: enhanced job interest leads reduction of staff turnover, in
turn leads lower recruitment costs.
CASH FLOW FORCASTING
It estimate overall cost and benefits of a product with respect to time.
• -ive cashflow during development stage.
• +ive cashflow during operating life.
During development stage
• Staff wages
• Borrowing money from bank
• Paying interest to bank
• Payment of salaries
• Amount spent for installation, buying hardware and software
Income is expected by 2 ways.
• Payment on completion
• Stage payment
Cost Benefit Evaluation techniques
It consider
• the timing of the costs and benefits
• the benefits relative to the size of the investment

Common methods for comparing projects on the basis

of their cash flow forecasting.
1) Net profit
2) Payback Period
3) Return on investment
4) Net present Value – Discount factor
5) Internal rate of return
Cost-benefit evaluation Techniques
Cash flow projections

Year Project 1 Project 2 Project 3 Project 4

0 -100000 -1000000 -100000 -120000
1 10000 200000 30000 30000
2 10000 200000 30000 30000
3 10000 200000 30000 30000
4 20000 200000 30000 30000
5 100000 300000 30000 75000
Net Profit 50000 100000 50000 75000

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Net profit
• Net profit is calculated by subtracting a
company's total expenses from total income.
i.e what the company has earned (or lost) in
a given period of time (usually one year).
also called net income or net earnings.
Net profit=total costs-total incomes
Payback Period
• The payback period is the time taken to recover the initial
investment.
Or
• It is the length of time required for cumulative incoming returns to
equal the cumulative costs of an investment
Advantages
• Simple and easy to calculate.
Disadvantages
• It is also a seriously flawed method of evaluating investments
• It attaches no value to cash flows after the end of the payback
period.
• It makes no adjustments for risk.
• It is not directly related to wealth maximisation as NPV is.
• It ignores the time value of money.
• The "cut off" period is arbitrary.
Pay back period
The time taken to break even or pay back the initial
investment

Year Cash-flow Accumulated

0 -100,000 -100,000
1 10,000 -90,000
2 10,000 -80,000
3 10,000 -70,000
4 20,000 -50,000
5 100,000 50,000

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Calculate Payback Period
Year Project1 Project2 project3
0 -100000 -1,000,000 -120000
1 10,000 2,00000 30,000
2 10,000 2,00000 30,000

3 10,000 2,00000 30,000

4 20,000 2,00000 30,000

5 100000 3,00000 75,000

It ignores any benefits that occur after the payback

period and, therefore, does not measure profitability.
It ignores the time value of money.
Project1 =10,000+10,000+10,000+20,000+1,00,000=1,50,000
Project 2= 1,00,000+2,00,000+2,00,000+2,00,000+3,00,000=11,000,00
Project 3= 30,000+30,000+30,000+30,000 + 75,000 =1,95,000
 Return on investment (ROI)

ROI = Average annual profit X 100

Total investment
ROI is also known as Accounting Rate of Return (ARR)
In the previous example

• average annual profit

= 50,000/5
= 10,000

• ROI = 10,000/100,000 X 100 =

10%

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Ex1
• Calculate the ROI for the following projects
and comment, which is the most worthwhile.

Investment Net profit

• Project1 150000 50000
• Project2 1,000000 1,00000
• Project3 450000 40,000

• The period of above project is 5 years.

Ex2.

• There are two projects x and y. each project requires an investment of Rs

20,000. you are required to rank these projects according to the pay back
method from the following information.

• Year project x project y

• 1 1000 2000
• 2 2000 4000
• 3 4000 6000
• 4 5000 8000
• 5 8000
Net Present Value
• NPV is a project evaluation technique that takes into
account the profitability of a project and the timing of
cash flows that are produced.
• It does by discounting future cash flows by % known as
discount rate.
• Rs 100 in a year’s time is the equivalent of Rs. 91 now
with 10% interest
value in year t
Present value =
(1+𝑟)𝑡
• NPV can also be calculated by multiplying cash flow
and discount factor
https://scroll.in/article/802737/full-text-raghuram-rajan-on-dosa-economics-
financial-reforms-and-perils-of-debt-driven-growth

87
Discount factor
Discount factor = 1/(1+r)t
r is the interest rate (e.g. 10% is 0.10)
t is the number of years

In the case of 10% rate and one year

Discount factor = 1/(1+0.10) = 0.9091
In the case of 10% rate and two years
Discount factor = 1/(1.10 x 1.10) =0.8264

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Applying discount factors
Year Cash-flow Discount Discounted cash
factor(discount flow
rate 10%)
0 -100,000 1.0000 -100,000
1 10,000 0.9091 9,091
2 10,000 0.8264 8,264
3 10,000 0.7513 7,513
4 20,000 0.6830 13,660
5 100,000 0.6209 62,090
NPV 618
The figure of RM618 means that RM618 more would be made than if the
money were simply invested at 10%. An NPV of RM0 would be the same
amount of profit would be generated as investing at 10%. 9090
Comparing projects with NPV

• Selecting Discount rate – difficult

• Discount rate should be chosen to reflect available interest
rates (borrowing costs where the project must be
funded from loan)

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Internal rate of return
• Internal rate of return (IRR) is the discount rate that would
produce an NPV of 0 for the project
• Can be used to compare different investment opportunities
• There is a Microsoft Excel function which can be used to
calculate IRR
• Net Present Value (NPV) and Internal Rate of Return (IRR)
are collectively known as Discounted Cash Flow (DCF)
techniques

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RETURN ON INVESTMENT or ACCOUNTING RATE OF RETURN

• It provides a way of comparing the net profitability to the

investment required.
Or
• A performance measure used to evaluate the efficiency of
an investment or to compare the efficiency of a number of
different investments

• Disadvantages

• It takes no account of the timing of the cash flows.

• Rate of returns bears no relationship to the interest rates offered or changed
by bank.
Net present value (NPV) Discount factors

• Discounted Cash Flow (DCF) is a cash flow summary adjusted to reflect the time
value of money. DCF can be an important factor when evaluating or comparing
investments, proposed actions, or purchases. Other things being equal,
the action or investment with the larger DCF is the better decision.
When discounted cash flow events in a cash flow stream are added together, the
result is called the Net Present Value (NPV).

• When the analysis concerns a series of cash inflows or outflows coming at

different future times, the series is called a cash flow stream. Each future cash
flow has its own value today (its own present value). The sum of these present
values is the Net Present Value for the cash flow stream.

• The size of the discounting effect depends on two things: the amount of time
between now and each future payment (the number of discounting periods) and
an interest rate called the Discount Rate.
Risk evaluation

• What is Risk?
An uncertain event / condition when occurred may have positive or
negative effect on the project objectives
• Why is Risk evaluation to be made?
Risk evaluation is meant to decide whether to proceed with the project
or not, and whether the project is meeting its objectives.
• When does Risk Occurs?
– When the project exceed its original specification
– Deviations from achieving it objectives and so on.

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Risk Identification and ranking
• Identify the risk and give priority.
• Could draw a project risk matrix for each project to assess risks
• Project risk matrix used to identify and rank the risk of the project
ஊற ொரொல் உ ் பின் ஒல் கொமை இவ் விரண்டின்
ஆற ன்பர் ஆய் ந்தவர் ககொள் . (662)
• Not to perform a ruinous act, and not to be discouraged by the ruinous termination
of an act, are the two maxims which, the wise say, from the principles of those who
have investigated the subject.
• Example of a project risk matrix

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Risk and Net Present Value
For riskier projects could use higher discount rates
Ex: Can add 2% for a Safe project or 5 % for a fairly risky one.
Cost benefit Analysis
Consider possible outcome and estimate probability of occurring
and its value
Set of cash flow forecasts with each probability of occurrence
Value of the project is the Sum of cost or benefit for each
probability

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Risk profile analysis
• An approach to overcome the objection to cost-
benefit averaging making use of “risk profiles” using
sensitivity analysis.
• It compares the sensitivity of each factor of project
profiles by varying parameters which affect the project
cost benefits.
Ex:
• Vary the original estimates of risk plus or minus 5%
and re-calculate the expected cost benefits.
• P1 depart far from p2, have large variation
• P3 have much profitable than expected
• All three projects have the same expected profit
• Compare to p2 , p1 is less risky.
Decision trees

• Identify over risky projects

• Choose best from risk
• Take suitable course of action

Decision tree of analysis risks helps us to

• Extend the existing system

 increase sales
 improve the management information

• Replace the existing system

 Not replacing system leads in loss
 Replace it immediately will be expensive.
Decision trees
• The expected value of Extending
system=
(0.8*75,000)-
(0.2*100,000)=40,000 Rs.

• The expected value of Replacing

system=
(0.2*250,000)-
(0.8*50,000)=10,000 Rs.

Therefore, organization should

choose the option of extending the
existing system.

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 NPV (Rs)
Ex 1: Further extension
-100,000

0.5
80,000
Extend
0.5
No extension

D2
Further extension
0.5 200,000
0.1
Extend Replace

0.5
No extension -30,000
0.9
D1 Further extension
Replace 0.1
-100,000

0.9
No extension 75,000
Replace

0.2
Further extension
250,000
0.8
No extension -50,000
Programme management

Definition:
‘a group of projects that are managed in a co-ordinated way to
gain benefits that would not be possible were the projects to be
managed independently’ -Ferns
Programmes may be
• Strategic
• Business cycle programmes
• Infrastructure programmes
• Research and development programmes
• Innovative partnerships

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Programme managers versus project managers

Programme manager Project manager

– Many simultaneous projects
– Personal relationship with
skilled resources
– Optimization of resource
use
– Projects tend to be seen as
similar
– One project at a time
– Impersonal relationship with
resources
– Minimization of demand for
resources
– Projects tend to be seen as
unique

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Strategic programmes

• Initial planning document is the Programme Mandate

describing
– The new services/capabilities that the programme should
deliver
– How an organization will be improved
– Fit with existing organizatioal goals
• A programme director to be appointed

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Next stages/documents
• The programme brief – equivalent of a feasibility
study: emphasis on costs and benefits
• The vision statement – explains the new capability
that the organization will have
• The blueprint
– Business model - explains the changes to be made to
obtain the new capability
– Organizational structure –No. of staff required and
skills
– Information systems, equipment and other resources

106
Benefits management

developers users organization

use for

the
benefits
application
build to deliver

•Providing an organization with a capability does not

guarantee that this will provide benefits envisaged – need for
benefits management
•This has to be outside the project – project will have been
completed
•Therefore done at programme107level
Benefits management

To carry this out, you must:

• Define expected benefits
• Analyse balance between costs and benefits
• Plan how benefits will be achieved
• Allocate responsibilities for their achievement
• Monitor achievement of benefits

108
Types of Benefits
• Mandatory requirement
• Improved quality of service
• Increased productivity
• More motivated workforce
• Internal management benefits
• Risk reduction
• Economies
• Revenue enhancement/acceleration
• Strategic fit

109
Quantifying benefits
• Quantified and valued e.g. a reduction of x staff saving £y
• Quantified but not valued e.g. a decrease in customer
complaints by x%
• Identified but not easily quantified – e.g. public approval for a
organization in the locality where it is based

110
THANK YOU

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