1. Project Evaluation and Programme Management

2. A Business Case Introduction and Background to the proposal
The proposed project
The Market
Organizational and operational Infrastructure
The Benefits
Outline Implementation Plan
Costs
The financial Case
Risks
Management Plan

3. Project Portfolio Management
Project Portfolio Definition
Project Portfolio Management
Project Portfolio Optimization

4. Project Evaluation Evaluation of individual projects
How the feasibility of an individual project can be evaluated.
Technical assessment
Whether the required functionality can be achieved with current affordable technologies.
Organizational policies
H/W S/W infrastructure limitations
Cost of technology adapted

5. Project Evaluation Cost-benefit analysis
Cost-benefit analysis comprises two steps-
Identify costs and benefits of
Developing costs
Operating costs
Benefit expected from the new system
Expressing above costs in common units
Express cost and benefit in terms of a common unit

6. Cash Flow Forecasting (Cont’d)
Expenditure
Income
Need to spend money at first (e.g. staff salary, employment cost, hardware and software costs) no matter where the money comes from
e.g. resources from company, or money from the bank
If the money is from bank, you need to calculate the interest as well.
Software Project Management

7. Cost-benefit evaluation techniques
Net Profit
Difference b/w total cost and total income
Payback Period
Time taken to pay back the initial investment
Return on Investment
Compare the net profitability to the investment required
Net Present value
Used in capital budgeting to analyze the profitability of an investment or project.
NPV measures the total amount by which an investment is expected to increase based on the present value of its potential cash flows and initial cost.
Internal Rate of return

8. Cost-benefit Evaluation Techniques Example
Year
Project 1
Project 2
Project 3
Project 4
-100,000
-1,000,000
-120,000 1
10,000
200,000
30,000 2 3
20,000 4
25,000 5
100,000
350,000
50,000
Net Profit
60,000
150,000
45,000
Payback
ROI
12% 3%
Simple example: (where negative values represent net expenses, positive values represent net incomes)
Assumptions:
1. Cash flow take place at the end of each year.
2. The year 0 figure represents the initial investment made at the start of the project.

9. Cost-benefit Evaluation Techniques
Net profit
= Total income – Total costs
Payback period
Time taken to pay back the initial investment
Payback Period = Initial Investment Cost/ Annual Operating Savings
Return on Investment (ROI)
Net profit
Advantage: simple to use
Disadvantage: ignores the timing of the cash flow
Payback period
Advantage: simple to calculate, not particular sensitive to small forecasting errors
Disadvantage: ignores any income (or expenditure) after the payback period
Return on Investment (ROI)
Advantage: simple and easy to calculate, quite popular
Disadvantage:
1. ignores the timing of the cash flow
2. Potentially very misleading because it is very tempting to compare the rate of return with the current interest rates

10. Payback period
Let’s assume that a company invests $400,000 in more efficient equipment. The cash savings from the new equipment is expected to be $100,000 per year for 10 years. The payback period is 4 years ($400,000 divided by $100,000 per year).
A second project requires an investment of $200,000 and it generates cash as follows: $20,000 in Year 1; $60,000 in Year 2; $80,000 in Year 3; $100,000 in Year 4; $70,000 in Year 5. The payback period is 3.4 years ($20,000 + $60,000 + $80,000 = $160,000 in the first three years + $40,000 of the $100,000 occurring in Year 4)

11. Cost-benefit Evaluation Techniques – NPV
Net present value (NPV)
Present value is the value which a future amount is worth at present
It takes into account the profitability of a project and the timing of the cash flows
NPV
Advantage: takes into account the profitability of a project and the timing of the cash flows that are produced.
Disadvantage:
1. hard to select an appropriate discount rate
2. NPV might not be directly comparable with earnings from other investments or the costs of borrowing capital.

12. Cost-benefit Evaluation Techniques – NPV (cont’d)
Discount rate is the annual rate by which we discount future earning
e.g. If discount rate is 10% and the return of an investment in a year is $110, the present value of the investment is $100.

13. Cost-benefit Evaluation Techniques – NPV (cont’d)
Let n be the number of year and r be the discount rate, the present value (PV) is given by

14. Net present value
Would you rather I gave you £100 today or in 12 months time? If I gave you £100 now you could put it in savings account and get interest on it. If the interest rate was 10% how much would I have to invest now to get £100 in a year’s time? This figure is the net present value of £100 in one year’s time
If you invested £91 now you would get £9.10 in interest which would give you £ in 12 months

15. Net present value
NPV is a project evolution technique that takes into account the profitability and timing of the cash flows.

16. 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) =
In the case of 10% rate and two years
Discount factor = 1/(1.10 x 1.10) =0.8294

17. Applying discount factors
Year
Cash-flow
Discount factor
Discounted cash flow
-100,000
1.0000 1
10,000
0.9091
9,091 2
0.8264
8,264 3
0.7513
7,513 4
20,000
0.6830
13,660 5
100,000
0.6209
62,090
50,000
NPV
618
NPV is the sum of the discounted cash flows for all the years of the ‘project’ (note that in NPV terms the lifetime of the completed application is included in the ‘project’)
The figure of £618 means that £618 more would be made than if the money were simply invested at 10%. An NPV of £0 would be the same amount of profit would be generated as investing at 10%.

18. Cost-benefit Evaluation Techniques – NPV (cont’d)
Disadvantage
May not be directly comparable with earnings from other investments or the costs of borrowing capital

19. Cost-benefit Evaluation Techniques – IRR
Internal Rate of Return (IRR)
IRR can be used to rank several prospective projects a firm is considering.
the project with the highest IRR would probably be considered the best and undertaken first.
Use Excel to demonstrate the calculation of NPV and IRR. See file ‘lect03-npv.xls’.
The IRR being a relative measure does not indicate the absolute size of the return.

20. Cost-benefit Evaluation Techniques – IRR (cont’d)
Useful
Dismiss a project due to its small IRR value
Indicate further precise evaluation of a project
Supported by MS Excel and Lotus 1-2-3
It is convenient in the sense that further calculation are not required.
It is useful in the sense that, in many cases, it is sufficient to dismiss a project or indicate further investigation of a project even though it is an approximation.

21. Net profit
‘Year 0’ represents all the costs before system is operation
‘Cash-flow’ is value of income outgoing
Net profit value of all the cash-flows for the lifetime of the application
Year
Cash-flow
-100,000 1
10,000 2
40,000 3 4
60,000 5
100,000
Net profit
See Section 3.12 for further details. Exercise 3.2 is applicable here