1. Project management tools4
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.

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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:

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Network diagram