Project Appraisal and Management

Course Code: BBA 411

Book Reference
Project Management: A managerial Approach
by
Jack R. Meredith, Samuel J. Mantel, JR
Project Management
Project
A single time activity undertaken to
achieve a specific objective in a
specific time period.
 Project
Characteristics
• Purpose: A one time activity with a well-defined
set of desired end results
• Life cycle: Project has a life cycle. From a slow
beginning they progress to buildup of size, then
peak, begin a decline, and finally must be
terminated.
• Interdependencies: Projects often interact with
other projects being carried out simultaneously
by their parent organization;
 Project

• Uniqueness: Every project has some elements that are unique.

• Conflict: Most PM lives in a world characterized by conflict. The
major four parties or stakeholders (client, parent organization,
project team and public) in any project define success and failure
in different ways.
 Project Management
Project Management can be defined as the
planning, organizing, directing and controlling of
resources (people, equipment, material and
information) to meet the technical, cost and time
constraints of the project. – Chase and
Aquilano
 Project Management
Role of project managers
The role of project manager should be outlined in the project charter
along with the purpose of the project.
• Ability to select and develop an operational team
• Ability to lead
• Ability to anticipate problems, solve problems and make decisions
• Ability to integrate the project stakeholders
 Project Management
• Ability to negotiate and persuade
• Understand the environment within which the project is
being managed
• Ability to manage within an environment of constant
change
• Ability to keep the client happy
 Organizational and managerial framework of a
project
A project management framework provides guidance to the
managers for managing of a project. Some specific
approaches to management developed in the 20 th
century also have significant contribution to overall
understanding of management. That are:
• Scientific management
• Administrative theory
• Behavioral approach
• Quantitative approach
• System approach
• Contingency approach
• Scientific Management
In 1909, Taylor published The Principles of Scientific Management. In this
book, he suggested that productivity would increase if jobs were optimized
and simplified. He also proposed matching a worker to a particular job.

Scientific management has four core principles that also apply to

organizations today. They include the following:

• Look at each job or task scientifically to determine the “one best way” to
perform the job.
• Hire the right workers for each job, and train them to work at maximum
efficiency.
• Monitor worker performance, and provide instruction and training when
needed.
• Divide the work between management and labor so that management can
plan and train, and workers can execute the task efficiently.
• Administrative Theory
General administrative theorists
-Henri Fayol (France)
Fourteen principles of management: fundamental and universal principles of
management practice
-Max Weber (Germany)
Bureaucracy: ideal type of organization characterized by division of labor, a
clearly defined hierarchy, detailed rules and regulations, and impersonal
relationship.

• Human Relation Approach to Management

Human relation approach focuses upon individual behavior, motivations,
and social interactions.
Hawthorne Experiments: Professor Elton Mayo is known as the Father of
the Human Relations Approach to Management Theory
The findings were as follows:
• Groups (Social Factors) are important determinants of job performance
and output.
• Individuals are not only motivated by compensation.
• Employees prefer a cooperative attitude from superiors, rather than
command and control.
• Communication between management and employees is essential to
understand employee issues.
• Quantitative School of Management
The quantitative approach to management involves the use of
quantitative techniques, such as linear programming, game theory,
information models, and computer simulations, to improve decision
making.

• Systems Approach
A system is an interrelated set of elements functioning as a whole. An
organization as a system is composed of four elements:
Inputs — material or human resources
Transformation processes — technological and managerial processes
Outputs — products or services
Feedback — reactions from the environment
• Contingency Approach
The contingency school of management can be summarized as an “it
all depends” approach. The appropriate management actions and
approaches depend on the situation. The contingency approach is
highly dependent on the experience and judgment of the manager in a
given organizational environment.
 Chapter 2: Project Selection
Project selection is the process of evaluating individual projects,
and then choosing the best project/s to implement so that the
objectives of the parent organization will be achieved.

Different models are used to evaluate project/s. some of those are

quantitative and some are non quantitative.
 Types of project selection models
Nonnumeric
• The Sacred Cow: In this case the project is suggested by a
senior and powerful official in the organization.
• The operating Necessity: If a flood is threatening the plant, a
project to build a protective dike does not require much formal
evaluation.
 Types of project selection models
• Q-Sort: This helps in preparing a list of projects that are on priority. In
this technique, the project manager gathers the ideas of the project
and then classifies them as good, fair or bad

• Comparative benefit model: Sometime when it is necessary to

choose one project from multiple projects and difficult to make clear
comparison, the committee may think that some projects will benefit
the firm more than others, even if they have no precise way to define or
measure benefit.
 Types of project selection models

Major Numeric Models

• PBP (Pay Back Period)
• NPV (Net Present Value)
• IRR (Internal Rate of Return)
• BCR (Benefit Cost Ratio)
• PI (Profitability Index) etc.
o Payback period
The payback period represents the time, the project takes to
return the money spent on the project. The projects that have a
lower payback period are taken over those with a higher payback
period.

The payback period is calculated from the following formula:

Cost of the project / Annual cash inflow from the project

For example, suppose a project costs $200,000 to operate and has

annual net cash inflows of $40,000. Then

Payback Period = $200,000 / $40,000v = 5 Years

Problem 1: Suppose that you are working as a project manager in
an organization. Suggest the management which one project
should be taken using pay back period. Consider the following
information.

Project A Project B
Project costs Tk. Project costs Tk.
15,00,000 20,00,000
Net cash inflows per Net cash inflows per
year Tk. 5,00,000 year Tk. 5,50,000
Problem 2. An industry is considering investment in a project
which cost tk. 6,00,000. Cash inflows are as following. Calculate
payback period of the project.

Years Cash Flows (Tk)

1 1,20,000
2 1,40,000
3 1,80,000
4 2,00,000
5 2,50,000
o Net Present Value (NPV)
Net present value is the difference between the project’s current
value of cash inflow and the current value of cash outflow.

Streps to calculate NPV

Step 1: Discounting the cash flows over different periods
Step 2: The initial investment is deducted from discounted cash
flows.

Decision rule:
• If the result is a positive NPV, then the project is accepted.
• If the NPV is negative, the project is rejected.
Format to calculate NPV:

Year Cash Flows Discounting Present Value

Factor
0 (Initial Investment)

NPV XXX
Problem 1: Calculate the following two projects and suggest which
one should be selected assuming discount rate is 10%.

Project X Project Y
Initial Investment Tk. 40,000 Tk. 60,000
Estimated Life 5 Years 5 Years

Cash Inflows

Year 1 2 3 4 5
Project X 10,000 20,000 20,000 6,000 4,000
Project Y 40,000 20,000 10,000 6,000 4,000

Year 1 2 3 4 5
PV Factor 0.909 0.826 0.751 0.683 0.621
@ 10%
o Internal Rate of Return (IRR)
IRR is a method of calculating an investment’s rate of return. The
IRR represents the discount rate at which the NPV of an investment is
zero.
NPV zero indicates the rate where project’s cash flows are equal to
project’s costs.
Steps to calculate IRR
Step 1: Calculate two NPVs for the project at two different
discounting factors.
Step 2: Use the formula to find out the IRR

IRR= Lower Rate + ( NPV at lower rate/(NPV at lower rate-NPV at

higher rate) * (Higher rate – Lower rate)
Problem 1: Calculate the Internal Rate of Return of an investment of Tk.
1,36,000 which yields the following cash inflows at 10% and 12% discount
rate.
Year Cash Inflows (Tk.)

1 30,000

2 40,000

3 60,000

4 30,000

5 20,000

Year 1 2 3 4 5
PV factor 0.909 0.826 0.751 0.683 0.621
@ 10%
@12% 0.893 0.797 0.712 0.636 0.567
o Profitability Index (PI)
The PI measures the ratio between present value of future
cash inflows and the present value of cash outflows.

PI= PV of Cash Inflows / PV of Cash Outflows

The index is a useful tool for ranking investment projects.

Decision Rule
If PI > 1 then accept the project
If PI < 1 then reject the project
Problem 1:
Suppose we have three projects involving discounted cash
outflow of Tk. 5,50,000, Tk. 75,000, and Tk. 3,15,000
respectively. Suppose further that the sum of the
discounted cash inflows for these projects are Tk. 6,50,000,
Tk. 95,000 and Tk. 3,25,000 respectively. Calculate the
profitability index for the three project.