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Lec-3

Course Instructor:

Rehan Asad
rehanasad@cuilahore.edu.pk
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Agenda

➢ Initiation
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Initiation:

1. Develop project charter

2. Identify stakeholders
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1. Develop Project Charter

Process of developing a document that formerly authorizes the existence

of a project and provides the project manager with the authority to apply
organizational resources to project activities.
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What should a charter have?

• Project charter should have The high level requirements of the project,
time to complete the work and the high level summary budget.

• It Should name the project manager

• It should be signed by the project sponsor.
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Inputs

1. Project statement of work (SWO)

2. Business case
3. Agreements
4. Enterprise environmental factors (EEFs)
5. Organizational process assets (OPAs)
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1. Develop Project Charter: Inputs

I. Project Statement of Work (SWO)

• The statement of work is a written description of product services or result to

be delivered by the project .
• It describes what is to be produced by the project .
• SOW is initiated within organization or from outside the company .
• for example ???
• Store Department asking the IT to develop a computer system for controlling
inventory .IT would initiate this as a project and would develop a charter for it .
• In case from outside, the SWO is generated by the customer or client asking a
company to carry out work
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1. Develop Project Charter: Inputs

II. Business Case:

Business need and analysis used to justify the project is worth
the investment and how it fits into the organization strategic
plan.

• This document becomes part of the project charter .

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Business Case:
• There are various ways, which can be carried out such as :

a. Present value (PV)

b. Net Present Value (NPV)
c. Internal rate of return (IRR)
d. Pay back period
e. Cost benefit analysis
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1. Develop Project Charter: Inputs

II. Business Case:

a. Present Value (PV)
How much is the value today of a future cash flow?
𝑭𝑽
𝑷𝑽 =
(𝟏 + 𝒓)𝒏
FV = Future Value
r = Interest rate
n = Number of time period
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Question:
What is the present value of $300000 received three years from now if
we expect the interest rate to be 10% ? should the answer be more or
less then $300,000 ?

Solution:
𝑭𝑽
𝑷𝑽 =
(𝟏 + 𝒓)𝒏

$300,000
𝑃𝑉 = 3
= $ 225,394
(1 + 0.1)
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1. Develop Project Charter: Inputs

II. Business Case:

b. Net Present Value (NPV):
Present Value of the total benefit (Income or revenue) - Cost, over many time
periods.

▪ If the NPV is positive the investment is good choice

▪ Project with greatest NPV is selected
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Net Present Value (NPV):

Time period Income/revenue* PV of income at 10% Costs* PV of Cost at 10%
interest rate* interest rate*
0 0 0 200 200
1 50 45 100 91
2 100 83 0 0
3 300 225 0 0
Total 353 291

*in thousands of dollars

Therefore, NPV= 353-291 = 62

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1. Develop Project Charter: Inputs

II. Business Case:

c. Internal Rate of Return (IRR)
How much return you will make on your investment?

Question: An organization has two project from which to choose:

project A with an IRR of 21% or project B with an IRR of 15%.
which one is a better option ??
Answer: Project A
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1. Develop Project Charter: Inputs

II. Business Case:

d. Cost benefit Analysis:
Cost benefit analysis compares the expected cost of the project to
the potential benefits it could bring the organization.

Benefit cost ratio > 1; benefit is greater than the cost

Benefit cost ratio < 1; cost is greater than the benefit
Benefit cost ratio = 1; cost and benefits are the same
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1. Develop Project Charter: Inputs

II. Business Case:

d. Cost benefit Analysis:
What does benefit cost ratio of 1.7 percent means?
a) Costs are greater than the benefits
b) Revenue is 1.7 time the cost
c) Profit is 1.7 times the cost
d) Costs are 1.7 times the profit
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1. Develop Project Charter: Inputs

II. Business Case:

e. Payback Period:
Length of time it takes for the organization to recover its
Investment in the project before it starts accumulate profit.
Question: There are 2 project from which to choose:Project A with the
payback period of 6 month or project B with payback period of 18
months which one should the organization select ?
Answer: Project A
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Exercise:
Project A Project B Which project would
you pick?
NPV $95,000 $75,000
IRR 13% 17%
Payback Period 16 months 21 months
Benefit cost ratio 2.79 1.3
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• Opportunity Cost:

-This term refers to the opportunity given up by selecting one project

over another .
-It Is the value of the project not selected
• Question: An organization has two projects to choose from: project A with NPV of $45,000
or project B with NPV of $85,000. which project should be selected and state the
opportunity cost?

• Sunk Cost
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1. Develop Project Charter: Inputs

III. Agreements:
• Any agreements between any two or more parties can generate a
project and will require a project charter .

• These can be contracts, memorandum of understanding (MOU),

service level agreements (SLA), letter of intent (LOI), verbal agreements
emails or any other written agreement.
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1. Develop Project Charter: Inputs

IV. Enterprise environmental factors (EEFs):
EEFs is an input of the project charter as these will provide information on the local
conditions both inside and outside the company including:
▪ Organizational structure
▪ Government standards , regulations
▪ Market conditions and other
IV. Organizational process assets (OPAs):
OPAs will help in developing project charter by providing:
▪ Standard operating procedure/processes,
▪ Template/forms
▪ Historical information from previous projects
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1. Develop Project Charter: Output

1) Project Charter:
Project charter will have :
▪ Purpose of the project
▪ Project objective which are measurable
▪ Assumptions and constraints
▪ High level description of the boundaries
▪ Summary milestone, budget
▪ Stakeholder list
▪ Approval requirements
▪ Project manager’s authority level
▪ Name of authority of sponsors
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Thank
you