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Engineering Project
Management
Lecture 3
Project Appraisal
The
The
There
A number of investment opportunities (in the form of potential project) may exist and these
must be examined and compared in terms of the deliverables and viability SELECTION
Project Managers are responsible for making the most effective use of finite RESOURCES and
this will often necessitate deciding where to allocate resources, when to allocate resources
and how much resource to allocate.
Process of Analysis/Appraisal
Identify a Problem or Opportunity
Conduct Feasibility Study / (Business
Case)
Define Scope and Objectives
Evaluate Alternatives
Project
Initiation
Phase
Project
Planning
Phase
Objectives of Project
Appraisal/Feasibility
The
Project Environments
Macro Spheres/
General
Environment
Competitive/
Meso Environment
Internal/
Micro Environment
SWOT Analysis
PEST Analysis
PESTLE Analysis
Power of suppliers
Intensity of rivalry
Power of Customers/
Buyers
Potential/Threats of
substitutes
BCG Matrix
Question
Marks:
These
are
projects with a low share of high
growth market. They consume
resources and generate little in
return
pattern
Process of Analysis/Appraisal
Identify a Problem or Opportunity
Conduct Feasibility Study / (Business
Case)
Define Scope and Objectives
Evaluate Alternatives
Project
Initiation
Phase
Project
Planning
Phase
Defining Scope
Scope Statement
What the project must deliver and sets the parameters of the project
Scope statement
Scope Management
It is the rigorous monitoring and control of the work necessary to complete the project
It defines what work is required and ensures that the project only includes that work.
Collect
Requireme
nt
Defin
e
Scope
Verif
y
Scop
e
Contro
l
Scope
Scope Creep
PMI defines scope creep as adding features and functionality (project scope) without addressing
the effects on time, costs, and resources, with or without customer approval.
Scope Creep ..
Aiming to please the customer (beyond what has been paid for)
Objectives
The project objective is a clear statement describing what the project is trying to achieve.
A well-worded objective will be Specific, Measurable, Achievable, Realistic and Time-bound
(SMART).
Objectives Vs Deliverables
Project objectives: These objectives describe the purpose of the project and what the
project will achieve from a business perspective. Generally, the project is considered to be
successful if the project objectives are met successfully.
Project deliverables. Deliverables describe the tangible products that are being built by
the project. All projects produce deliverables
Using XML in Excel
When you have completed creating your objectives and deliverables, go back and make
sure that theyre all in alignment.
SCALE CAN
WE AFFORD
THIS?
WILL THE
PROJECT MAKE A
PROFIT
COULD WE
MAKE BETTER
MONEY
ELSEWHERE
HOW SOON
WILL I SEE A
RETURN?
DO WE NEED
ADDITIONAL
RESOURCE?
HOW LONG IS
THIS PROJECT?
It includes a cost benefit analysis and takes into account all the relevant factors such as:
ROI
IRR
Pay Back Period
NPV
Return on Investment
The simplest way to ascertain whether the investment in a project is viable is to calculate the return on
investment (ROI).
This calculation does not, however, take into account the cash flow of the
Payback Period
Payback is the period of time it takes to recover the capital
outlay of the project, having taken into account all the
operating and overhead costs during this period.
Usually this is based on the undiscounted cash flow so does
not take into account the time value of money
Payback is particularly important when the capital must be
recouped as quickly as possible as would be the case in shortterm projects
Pay Back Period = Investment/average per year return
e.g. a project investment is Rs 100 and average return is Rs
10 per year, so payback period would be = 100/10 = 10 years
Example
r= % return/100
= 100 (1+0.05)3
= Rs115.76
So if the Bank pays more than the Project returns, the Project is not feasible
Forward analysis
So, if the Project does not meet or exceed its present value of the Money, it is not feasible
NPV vs IRR
Whenever there is a conflict between NPV and another decision rule, you shouldalwaysuse NPV
NPV vs IRR
Year
Project
For project
A, theA
investment isProject
Rs 100
70
90
50
70
NPV
99.17
132.23
IRR
9.54%
10.94 %
Definitely, here the Project B is more feasible and IRR compliments NPV
NPV Vs IRR
Year
Project A
Project B
-100
-250
105
130
49
254
NPV (@10%)
128.92
317.35
IRR
24.9 %
23.9 %
Capital Rationing
In this situation, the decision maker is faced
with a limited capital budget. As a result, it
may not be possible to take all positive net
present value projects. Under this scenario,
the problem is to find that combination of
projects (within the capital budgeting
constraint) that leads to the highest Net
Present Value.
The problem here is that the number of
possibilities become very large with a
relatively small number of projects. Thus,
in order to make the problem
"manageable", we can systematize the
search.
Capital Rationing
We would want to choose that set of projects within the capital
budgeting constraint that gives the highest:
Net Present Value
INVESTMENT
This ratio is called the profitability Index
Capital Rationing
Suppose we have a Capital Budget of Rs 100 and 5
viable options
Project
Investment
NPV
45
50
15
16
80
82
10
20
24
Strategic Fit
Risk Assessment
Competitive Position
Technical/Operational/Marketing
drivers
Track record
HSE/Legal/HR/Commercial issues or
challenges
Management
considerations etc.,
of
change
Discount Rate:
Organizations sometimes seriously lack the understanding that the Discount Rate is:
Minimum Return required (Adjusted for Time Value) + Adjustment For Risk
Companies generally assume they are actually earning the discount rate if they achieve a
NPV of Zero or greater.