Project management tools 4 Project management tools Learning objectives To understand the concept of the present value of moneys receivable in the future. To learn the various feasibility studies for a project. To learn the common methods used to evaluate projects. To understand the two most popular project management tools.

key terms activity annuity cash inflow cash outflow cost-benefit analysis critical path depreciation discounted cash flow event net present value network diagram opportunity cost pay back period predecessor activity present value present value factor slack time tax benefit of depreciation time value of money

Project feasibility The feasibility study for a project should be undertaken in the following order: technical feasibility operational feasibility economic feasibility

Technical feasibility Determining the availability of the appropriate technology for the project Determining its viability in the organisation’s operating environment Consider: computer hardware computer software information from technical and trade journals specialist information technology consultants

Operational feasibility Evaluate information provided by the operations of the proposed system to assess user satisfaction Dissatisfaction – system may be ineffective and inoperable Consider for new system: willingness of employees to accept operational changes management support and commitment management input of their system requirements transition into the new system willingness of the organisation to accept resulting organisational changes

Economic feasibility Cost-benefit analysis of new project to determine: whether or not the investment provides expected returns and/or recovers the outlay on the project over its useful life Consider: costs involved type of costs timing of costs amount of individual costs expected benefits timing of monetary benefits amount of monetary benefits

Timing of costs and benefits Costs incurred today and costs incurred in the future are not comparable because of the TIME VALUE OF MONEY Costs and benefits of a project occur at different times during the projects - to be comparable they must be converted to today’s value – the PRESENT VALUE - using the present value factor - PVF

Present value factor The present value factor is derived from the compound interest formula The PVF is represented by (1 + r)n in the formula: Where: A = amount receivable in the future P = present value of the future amount r = rate of interest per period n = number of periods

Present value factor of an annuity An ANNUITY refers to equal sums of money payable at equal intervals over a number of periods The present value of $1 payable at the end of each year over a number of years at a stated percentage of interest is called the present value factor of an annuity (PVFA) and is calculated by the formula:

Opportunity costs Mutually exclusive projects: opportunity exists to invest in two equally rewarding projects only one can be chosen by choosing one the alternative is forgone

Depreciation - tax benefit Taxable profit (taxable income) is calculated by deducting allowable expenses from revenues (assessable income) Allowable expenses include depreciation of assets Depreciation is not an actual cash flow But tax payable is reduced and this is considered a cash inflow

Net present value A technique used to economically evaluate the financial investment in a project NPV uses time value of money to compare projects NPV = the Sum of the Present Value of all Cash Inflows less Sum of the Present Value of all Cash Outflows for the project The highest NPV value indicates the most profitable project

Pay back period Compares the length of time different projects take to recoup the initial outlay on the project or investment Simple pay back period time taken for the actual cash flows to recoup the initial outlay Discounted pay back period time taken for the discounted cash flows to recoup the initial outlay

Internal rate of return A technique used to economically evaluate the financial investment in a project IRR uses time value of money to compare projects IRR is the interest rate that would make the NPV equal to zero If a project’s IRR exceeds required rate of return – project is acceptable

Gantt charts Show the sequence and duration of each activity within a project The bar for each activity runs from the start date to the completion date of that activity

The Program Evaluation and Review Technique Used to manage and schedule a network of interdependent project activities A network diagram depicts the order in which activities are performed Used to calculate the time the project will take to complete Critical path – the sequence of activities that will take the longest time

Network diagram