Module 2

Project Appraisal And

Selection

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

• Organization that you are working has got 10
different projects from most reputed
stakeholders?
• How the kate and the management decide
which project we are going to execute and
which projects that we are going to hold or
reject.?

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

following better
project selection
methods.
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
What is for project selection method ?
When you have a number of interesting and
challenging projects to choose from, finding a project
that is the right fit for your team’s skillset, level of
competence, and has the best chance of success is
the first step in effective project management.
Project Selection Methods offer a set of time-tested
techniques based on sound logical reasoning to
choose a project and filter out undesirable projects
with very low likelihood of success.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 What are Project Selection Methods?
(Cont.)
This is where project selection methods come
into play. There are two categories of project
selection methods:
 Benefit Measurement Methods (Comparative approach)
 Constrained Optimization Methods (Mathematical approach)

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 What are Project Selection Methods?
(Cont.)
Although time-consuming, employing these methods is
essential for an effective business plan. There are
variety of documented methods for selecting a project,
but the basic thumb rule is: is
small projects that aren’t very complex, the Benefit
Measurement Model is useful.
whereas if it’s a large, complex project, the
Constrained Optimization Method is a better fit.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Benefit measurement method (comparative
approach)

1) Murder board (a panel of people who try to shoot

down a new project idea).
2) Peer review
3) Scoring models
4) Economic model

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Constrained Optimization Methods (Mathematical approach)

1) linear programming
2) Integer programming
3) Dynamic programming
4) Multi objective programming

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Economic model of project selection

1) present value (PV)

2) Net present value (NPV)
3) Internal Rate of return (IRR)
4) Payback Period
5) Cost - Benefit Analysis

In most of the times organization would like to

consider more than one of these models when
selecting a project.
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
 Present value (PV)
The current value of one or more future cash
payments, discounted at some appropriate
interest rate.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Present value (PV)
(cont. )
what is the present value of $300,000 received
three years from now if we except interest rate
to be 10%? should the answer be more or less
than $300,000 ?

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Net Present value (NPV)
NPV provides the means for the organization to
compare many projects and select the best
project to initiate. Generally if the NPV is
positive, the investment is a good choice unless
an even better opportunity exist. The project
with greatest NPV is typically selected.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Net Present value (NPV)
(Cont.)
Question:
An organization has 2 projects to choose from.
The project A will take 3 years to complete has
an NPV of $45,000. project B will take six years
to complete and has an NPV of $85,000. which is
the better investment ?

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
Sam supposed to do a software project where
the initial investment would be $10,000. each
and every year Sam would believe that below
cash outflow will happen. in first year $2500 , in
second year $4000, in third year $ 5000, in
fourth year $3000 and in fifth year $1000.
calculate the NPV for the above project.
(Note : Rate = 6%)

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Net Present value (NPV)
(Cont.)
Calculate the NPV of the below.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Internal Rate of Return (IRR)

If a company has more than one project in

which to invest, the company may look at the
returns of the different projects and the select
the project with highest return.
Note : calculating the IRR is a complex
calculations and simply know the higher the IRR
number the better.

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Internal Rate of Return (IRR)
(Cont.)

question : An organization has two projects

from which to choose, project A with an IRR of
21% or project B with an IRR of 15%. which one
is better ?

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 payback Period

This is refers to the length of the time it takes for

the organization to recover its investment in the
project before it starts accumulating profit

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 payback Period (cont.)
Question:
There are two project from which to choose.
project A with payback period of six months or
project B with a payback period of 18 months .
which one should be the organization select ?

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

you invest $100 for a project and cash outflows
would happen as follows . calculate the payback
time period.
– year 1 : $40
– year 2 : $30
– year 3 : $30
– year 4 : $24
– year 5 : $15

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 payback Period (cont.)
In some cases the best choice might be a project
that has a longer payback period but due to
various other advantages

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Cost- Benefit Analysis

cost benefit analysis compare the expected costs of the project

to the potential benefits it could bring the organization.
This analysis results in the calculation of a benefit cost ration,
which can be expressed as a decimal or ratio.
A benefit cost ratio of greater than 1 means the benefits are
greater than the costs.
A benefit cost ration of less than means the costs are greater
than the benefits.
A benefit cost ration of 1 means the cost and the benefits are
same.
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
 Question
Fill with the letter of the project that you would
like to start first.

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
Information
Systems

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 What is an Information System
An information system (IS) is an organized
system for the collection, organization, storage
and communication of information.
More specifically, it is the study of
complementary networks that people and
organizations use to collect, filter, process,
create and distribute data.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 How many different kinds of Information System are there?

Depending on how you create your classification, you can find almost
any number of different types of information system. However, it is
important to remember that different kinds of systems found in
organizations exist to deal with the particular problems and tasks that
are found in organizations. Consequently, most attempts to classify
Information systems into different types rely on the way in which task
and responsibilities are divided within an organization.
As most organizations are hierarchical, the way in which the different
classes of information systems are categorized tends to follow the
hierarchy. This is often described as "the pyramid model" because the
way in which the systems are arranged mirrors the nature of the tasks
found at various different levels in the organization.

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 What are the most common types of
information system in an organization?
While there are several different versions of the
pyramid model, the most common is probably a
four level model based on the people who use
the systems.
Basing the classification on the people who use
the information system means that many of the
other characteristics such as the nature of the
task and informational requirements, are taken
into account more or less automatically.
Chamath Gunasekara (PMP, MSc, BIT- UCSC
)
 What are the most common types of
information system in an organization? (Cont.)

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Transaction Processing System (TPS)
What is a Transaction Processing System?
Transaction Processing System are operational-level
systems at the bottom of the pyramid. They are
usually operated directly by shop floor workers or
front line staff, which provide the key data required
to support the management of operations.
This data is usually obtained through the
automated or semi-automated tracking of low-level
activities and basic transactions.
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
 Transaction Processing System (TPS)
(Cont.)
Function of the TPS
TPS are ultimately little more than simple data processing
systems.
Inputs Processing Outputs

Validation
Lists
Sorting
Detail reports
Transactions Listing
Action reports
Events Merging
Summary
Updating
reports
Calculation
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
 Transaction Processing System (TPS)
(Cont.)
Some examples of TPS
– Payroll systems
– Order processing systems
– Reservation systems
– Stock control systems
– Systems for payments and funds transfers
The role of TPS
– Produce information for other systems Used by
operational personnel + supervisory levels
– Efficiency oriented
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
 Management Information System
What is a Management Information System?
For historical reasons, many of the different types of
Information Systems found in commercial organizations are
referred to as "Management Information Systems".
However, within our pyramid model, Management
Information Systems are management-level systems that are
used by middle managers to help ensure the smooth running
of the organization in the short to medium term.
The highly structured information provided by these systems
allows managers to evaluate an organization's performance
by comparing current with previous outputs.
Chamath Gunasekara (PMP, MSc, BIT- UCSC
)
 Management Information System
(Cont.)
Functions of a MIS
MIS are built on the data provided by the TPS

Inputs Processing Outputs

Internal Transactions Sorting Summary reports

Internal Files Merging Action reports
Structured data Summarizing Detailed reports

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Management Information System
(Cont.)
Some examples of MIS
– Sales management systems
– Inventory control systems
– Budgeting systems
– Management Reporting Systems (MRS)
– Personnel (HRM) systems
The role of MIS
– Based on internal information flows
– Support relatively structured decisions
– Inflexible and have little analytical capacity
– Used by lower and middle managerial levels
– Deals with the past and present rather than the future
– Efficiency oriented
Chamath Gunasekara (PMP, MSc, BIT- UCSC)
 Decision Support System
What is a Decision Support System?
A Decision Support System can be seen as a knowledge based
system, used by senior managers, which facilitates the creation
of knowledge and allow its integration into the organization.
These systems are often used to analyze existing structured
information and allow managers to project the potential
effects of their decisions into the future. Such systems are
usually interactive and are used to solve structured problems.
They offer access to databases, analytical tools, allow "what if"
simulations, and may support the exchange of information
within the organization.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Decision Support System (cont.)
DSS manipulate and build upon the information
from a MIS and/or TPS to generate insights and
new information.
Inputs Processing Outputs

Modeling
Internal Transactions Simulation Summary reports
Internal Files Analysis Forecasts
External Information Summarizing Graphs / Plots

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Decision Support System (cont.)
Some examples of DSS
– Group Decision Support Systems (GDSS)
– Computer Supported Co-operative work (CSCW)
– Logistics systems
– Financial Planning systems
– Spreadsheet Models
The role of DSS
– Support structured or semi-structured decisions
– Have analytical and/or modeling capacity
– Used by more senior managerial levels
– Are concerned with predicting the future
– Are effectiveness oriented
Chamath Gunasekara (PMP, MSc, BIT- UCSC
)
 Executive Information system
Executive Information Systems are strategic-level
information systems that are found at the top of the
Pyramid.
They help executives and senior managers analyze the
environment in which the organization operates, to
identify long-term trends, and to plan appropriate courses
of action.
The information in such systems is often weakly structured
and comes from both internal and external sources.
Executive Information System are designed to be operated
directly by executives.
Chamath Gunasekara (PMP, MSc, BIT- UCSC
)
 Executive Information system (cont.)

Functions of an EIS
EIS organizes and presents data and information
from both external data sources and internal
MIS or TPS in order to support and extend the
inherent capabilities of senior executives.

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Executive Information system (cont.)

Functions of an EIS
Inputs Processing Outputs

External Data
Internal Files Summarizing Summary reports
Pre-defined Simulation Forecasts
models "Drilling Down" Graphs / Plots

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Executive Information system (cont.)

Some examples of EIS

Executive Information Systems tend to be highly
individualized and are often custom made for a
particular client group;

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Executive Information system (cont.)

The role of EIS

– Are concerned with ease of use
– Are concerned with predicting the future
– Are effectiveness oriented
– Are highly flexible
– Support unstructured decisions
– Use internal and external data sources
– Used only at the most senior management levels

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Home work
What mean by the term “Data Mining” ?
Describe the term, advantages , Disadvantages
of the technique to the modern day business
environments.
(Minimum 2 pages Average 600-700 words).

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
Question No.1

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Question No.2

A project is expected to result in $2 million in

five years. The current interest rate is 5%. What
is the PV of the project?
A. $1,359,252
B. $1,567,398
C. $1,784,972
D. $2 million
Chamath Gunasekara (PMP, MSc, BIT- UCSC
)
 Question No.3
For the facility expansion project, $100,000 would be
needed which is expected to generate a total of
$200,000 (in present value) over 5 years. What is the
Net Present Value (NPV) of the project?
A. $100,000
B. $200,000
C. $300,000
D. -$100,000

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Question No.4
You are considering a project for the expansion of facilities to
increase production owing to rising demands. The cost for
the expansion work and equipment would be $1,000,000
(NPV). It is expected that an increase in revenue of
$2,000,000 (NPV) would be realized with the expansion.
What is the Benefit-Cost Ratio (BCR) of the project?
A. 0.5
B. 20
C. 2
D. Not enough information to calculation

Chamath Gunasekara (PMP, MSc, BIT- UCSC)

 Question No.5
There are three projects for the organization to choose from:
Project A has an internal rate of return of 10%, Project B 20%
while Project c -20%. Based on the information provided,
which is the best project?
A. Project A
B. Project B
C. Project D
D. Not enough information provided

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
 Question No.6
In a project, the organization has purchases a machine for
$100,000 which was later found to be not suitable. What is
the $100,000 termed as?
A. Fixed Cost
B. Sunk Cost
C. Indirect Cost
D. Opportunity Cost

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
Question No. 7

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
Question No. 8

Chamath Gunasekara (PMP, MSc, BIT- UCSC

)
Thank you !
Chamath Gunasekara (PMP, MSc, BIT- UCSC)