Lecture 7

Project Tools and Evaluation

Abdisalam Issa-Salwe

Department of Computer Science

Faculty of Information Science and Technology
East Africa University

Topic list

 Gantt Chart
 Network analysis
 Project review evaluation techniques
(PERT)
 Histogram

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Gantt charts

 A Gant chart, named after the engineer

Henry Gantt, uses to plan the time scale
for a project and to estimate the amount of
resources required
 Displays the time relationships between
tasks in a project

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Gantt charts (cont…)

 A Gantt chart, each task takes up one row.

 Dates run along the top in increments of days,
weeks or months, depending on the total
length of the project.
 The expected time for each task is
represented by a horizontal bar
 Tasks may run sequentially, in parallel or
overlapping.

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Gantt charts (cont…)

 Gantt does not show the interrelationship

between activities as clearly as a network
diagram.
 A combination of Gantt chart and network
analysis will often be used to project
planning and resource allocation.

Critical Path Analysis (CPA)

 Also known as Critical Network Analysis
 Developed by Dupont and Remington
Rand in the late 1950s for managing plant
maintenance projects
 Uses one duration estimate for each
activity
 Provides basic framework for project
planning and control

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CPA (cont…)

 Network analysis requires breaking down

the project into task with estimate
durations and establishing a logical
sequence.
 Enables the minimum possible duration of the
project to be found
 Pinpoints the tasks which are on the critical
path,
 i.e. those tasks which, if delayed beyond the
allocated time, would delay the completion of the
project as a whole.
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CPA (cont…)

 Estimate the time needed to complete

each individual activity or task that makes
up a part of the project
 Sort out what activities must be done one
after another, and which can be done at
the same time, if required
 Estimate the critical path: the longest
sequence of consecutive activities through
the network.

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CPA (cont…)

Activity
Event
Event
Mobilise Drill
1 2 3
2 3
i
j i j
Duration (Days)

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CPA (cont…)

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CPA (cont…)

Prepare Apply Wait for Apply

wood undercoat undercoat gloss
to dry

1 2 3 4 5

40 mins 30 mins 120 mins 30 mins

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CPA (cont…)

The circles are called nodes and show:

The earliest start time
•This shows the earliest time
that the next task can start
The node number
•This makes it easier to 1
follow a path through a
network
The latest finish time
•This shows the latest time
that a task can finish without
Nodes delaying the next task

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CPA (cont…)

The arrows in the network show tasks

 Tasks use up resources (e.g. time)
 Activities are dependent on each other
 i.e. gloss cannot be applied until the undercoat has
dried

Prepare
wood

1 2

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CPA (cont…)

 There will be at least one critical path

extending from the beginning to the end of
the project.
 Tabulate activity times (early start, early
finish, late start, late finish, total float, and
free float) that can help you schedule
resources and identify schedule flexibility.

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 PERT
PERT: Program Evaluation and Review
Technique
 Developed in conjunction with Lockheed’s
development of the Polaris Missile in the late
1950s
 Requires three duration estimates for each
activity (optimistic, most likely, pessimistic)
 Allows for crude risk assessment on overall
project duration

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PERT (cont…)
 PERT is a technique for allowing for uncertainty in
determining project duration
 Each task is assigned a best, worst, and most
probable completion time estimate
 These estimates are used to determine the
average completion times for the entire project

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 PERT (cont…)
 PERT is a variation on Critical Path Analysis that
takes a slightly more sceptical view of time
estimates made for each project stage.
 For each activity in the project:
 Most likely and pessimistic estimates of times are
made, on the basis of past experience, or even
guest-work.
 Estimates are converted into a mean time and
also a standard deviation

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PERT (cont…)

 Use the formula below to calculate the

time to use for each project stage:

shortest time + 4 x likely time + longest time

---------------------------------------------------------
--
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 This helps to bias time estimates away
from the unrealistically short time-scales
normally assumed.
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PERT (cont…)

 Once the mean time and standard

deviation for the time have been
calculated for each activity, it should be
possible to do the following
 Estimate the critical path using expected
(mean) activity times
 Estimate the standard of the total project time

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Histogram

 Histogram shows a view of project data in

which resources requirements, usage, and
availability are shown against a time scale

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Histogram (cont…)

 The shapes of histograms will vary

depending on the choice of the size of the
intervals.
 A bar graph is much like a histogram,
differing in that the columns are separated
from each other by a small distance. Bar
graphs are commonly used for qualitative
variables.

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Topic questions

1. Explain what refers to Project Life Cycle

2. Name two phases of project life cycle
What is project phases?
3. Why project planning is important?
4. What is Gant chart
5. What is Critical Path Analysis (or
Network analysis)? Explain how CPA
does work?

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Abdisalam Issa-Salwe, Faculty of Computer Science & Engineering, Taibah University 25

Discussion Questions

 What are the main components of a

computer-based information systems?
 Why is systems analysis is necessary?
 What is the role of users during systems
analysis and design?

East Africa University, Faculty of Information Science and Technology, Department of Computer Science
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Project Evaluation

 Introduction
 Why evaluate?
 To decide a project feasibility
 To assess the level of risk

 What is evaluated
 Strategic issues
 technical issues

 economic issues

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Technical Issues

 Is it really understood what is required

technically
 If“no” can this be resolved before the start of
the project.
 Will any lack of understanding cause changes
to the project as it progress

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Technical Issues

 What functionality is require

 Can hardware accommodate this
 Is it within the bounds of current available
software and/or programming languages

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Economic Issues

 Cost-benefit analysis
 Cash flow forecasting
 Cost-benefit evaluation techniques
 Risk analysis

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Measures of IS Value

 Earnings growth
 Market share
 Customer awareness and satisfaction

One of my favourite quotes:

When you cannot measure, your knowledge is
of a meager and unsatisfactory kind.
Kelvin

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Justifying IS

 Categories:
 Tangible savings
 Intangible savings
 Legal requirements
 Modernization
 Pilot project

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Cost-Benefit Analysis

 The comparison of estimated costs and

benefits

 The general question is

 will
income and other benefits exceed costs
 how do the various project options compare

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Cost-Benefit Analysis

 Analysis is in two stages

 Identify
and estimate all costs and benefits
 Convert costs and benefits into common units
 normally monetary units
 Costs to be estimated
 Development costs
 Set-up costs
 Operational costs

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Cost-Benefit Analysis

 Benefits to be estimated
 direct benefits
 e.g. reduction in staffing levels
 Assessable indirect benefits
 e.g. reduction in operator errors
 Intangible benefits
 e.g. improved working conditions

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Cash Flow Forecasting

 Provides an estimate of the expenditure
incurred and the income generated
throughout the life of the product.
 It is time related
 It will provide an indication of when
positive and negative cash flow will occur

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Cost-Benefit Evaluation Techniques

Five techniques:
 Net profit
 Payback period
 Return on investment (ROI)
 Net present value
 Internal rate of return

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Cost-Benefit Evaluation Techniques

 Net Profit

 NP = total income - total cost

A very simple technique

 Does not consider time element
 Of limited use when used in isolation

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 Cost-Benefit Evaluation
Techniques
 Net Profit

Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200.000 30,000 30,000
2 10,000 200.000 30,000 30,000
3 10,000 200.000 30,000 30,000
4 20,000 200.000 30,000 30,000
5 100,000 300.000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
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Cost-Benefit Evaluation Techniques

 Payback period
 Time taken to break even
 i.e. payback initial investment
 Projects with short payback periods are
preferred nowadays
 Does not consider income or expenditure
after break even point is reached

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 Cost-Benefit Evaluation
Techniques
Net profit + payback period

Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200.000 30,000 30,000
2 10,000 200.000 30,000 30,000
3 10,000 200.000 30,000 30,000
4 20,000 200.000 30,000 30,000
5 100,000 300.000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
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Cost-Benefit Evaluation Techniques

 Return on investment (ROI)
 or Accounting rate of return (ARR)

 Compares investment required with net

profitability

 ROI= average annual profit / total investment x 100

 ROI for project 1 = 10,000 / 100,000 x 100 = 10%

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 Cost-Benefit Evaluation
Techniques
Net profit + payback period + ROI

Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200.000 30,000 30,000
2 10,000 200.000 30,000 30,000
3 10,000 200.000 30,000 30,000
4 20,000 200.000 30,000 30,000
5 100,000 300.000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
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Cost-Benefit Evaluation
Techniques
Net profit + payback period + ROI
ROI is Project 1 = 10% Project 2 = 2%
Project 3 = 10% Project 4 = 12.5%

Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200.000 30,000 30,000
2 10,000 200.000 30,000 30,000
3 10,000 200.000 30,000 30,000
4 20,000 200.000 30,000 30,000
5 100,000 300.000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
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Cost-Benefit Evaluation Techniques

 ROI is simple to calculate

 this makes it a popular method
 But, it has two major problems
 It
does not consider the time element
 The ROI gets compared to bank interest rates
 this is not a valid measure as timing and
compounding of interest are no considered
 This can lead to very misleading conclusions

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Cost-Benefit Evaluation Techniques

 Net present value (NPV)

 considers profitability
 takes account of the time element
 NPV discounts future cash flows
 to current money values
 it does this using a percentage rate called the
discount rate

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Cost-Benefit Evaluation Techniques
 NPV a simple example using inflation

 £100 today = £100

 £100 today will be worth less in a 12 months time if
inflation is 5%
 with 5% inflation £100 today = £95 in a years time

 today’s present value of £100 gained in 12 months

time would be worth only £95 if inflation is 5%
 £100 gained in 5 years = £78 today if 5% inflation

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Cost-Benefit Evaluation Techniques

 NPV a simple example (cont.)
 Another way of considering NPV is that it is the
reverse of looking at the value of money from the
past.

 i.e. with 5% inflation to have the same purchase

value of £100 5 years ago you would need to
spend £128 today

 NPV considers the value of money in the future

with today as the baseline

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Cost-Benefit Evaluation Techniques
 The formula for net present values of
future cash flows is
 present value = value in year t / (1+r)t
 where r is the discount expressed as a decimal
value
 and t is the number of years in the future

 A simpler method is to use discount tables

 present value = value in year t x discount factor

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Cost-Benefit Evaluation
Techniques
 Now calculate the NPV for each of the four projects.

Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200.000 30,000 30,000
2 10,000 200.000 30,000 30,000
3 10,000 200.000 30,000 30,000
4 20,000 200.000 30,000 30,000
5 100,000 300.000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
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 Cost-Benefit Evaluation
Techniques
Assuming a 10% discount rate, below is the NPV for
project 1. Calculate the NPV for projects 2, 3 & 4.

Year Project 1 Discount Discounted

cash flow factor @ cash flow
(£) 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
Net Profit 50,000 NPV: £618
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Cost-Benefit Evaluation
Techniques
 The NPV for all four projects.
Year Discount Discounted Cash flo w (£)
factor @
10% Project 1 Project 2 Project 3 Project 4
0 1.0000 -100,000 -1,000,000 -100,000 -120,000
1 0.9091 9,091 181,820 27,273 27,273
2 0.8264 8,264 165,280 24,792 24,792
3 0.7513 7,513 150,260 22,539 22,539
4 0.6830 13,660 136,600 20,490 20,490
5 0.6209 62,090 186,270 18,627 46,568

NPV 618 -179,770 13,721 21,662

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Cost-Benefit Evaluation Techniques

 Net present value disadvantages

 may not be comparable to
 other investments
 cost of borrowing capital

a solution to this is to utilise Internal Rate of

Return

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Cost-Benefit Evaluation Techniques

 Internal rate of return (IRR)

 provides a profitability measure as a
percentage return
 this directly comparable to interest rate
 IRR is used in conjunction with NPV

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Cost-Benefit Evaluation Techniques
 IRR is the discount rate when the NPV is 0
 e.g. in project 1 the IRR is just over 10%
 Calculation of IRR is trail and error when
done by hand
 IRR can also be estimated using a
graphical method
 Spreadsheet can often calculate IRR

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Cost-Benefit Evaluation Techniques

 IRR is the discount rate when the NPV is 0
 e.g. in project 1 the IRR is just over 10%

 Calculation of IRR is trail and error when

done by hand
 IRR can also be estimated using a
graphical method
 Spreadsheet can often calculate IRR

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 Cost-Benefit Evaluation
Techniques
 Using the graphical method

25000
20000
Net Present Value (NPV)

15000
10000
5000
0
-5000 5 15
-10000
-15000
-20000
Discount rate (%)

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Cost-Benefit Evaluation Techniques

 NPV and IRR are not the complete answer

 funding,future earning prediction,
organisation context must all be taken into
consideration

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Risk Analysis

 All projects involve some form of risk

 Project evaluation has risks associated
with it
 Risk Identification
 potential risks are identified, evaluated and
ranked

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