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Project Management
N G U Y E N H O A N G L A N P H D. P M P
D E PA R T M E N T O F I N D U S T R I A L E C O N O M I C S
SCHOOL OF ECONOMICS AND MANAGEMENT
ROOM 206 – C9
E M A I L : L A N . N G U Y E N H O A N G @ H U S T. E D U .V N
0905169617

Business case analysis

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Cost and Revenue

• Cost concept
• Cost classification
• Revenue

Cost Concept
• Manufacturing Costs:
◦ Direct materials
◦ Direct Labor
◦ Manufacturing overhead (indirect labor, indirect materials, maintenance
and repair on equipment; property taxes, depreciation, insurance, etc.)
• Non manufacturing Costs
◦ Marketing or selling costs (advertising, shipping, sales travel, sales
salary, etc.)
◦ Administrative costs (accounting, public relations, etc.)

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Cost classification
• Fixed Costs (capacity cost): costs are expected to remain constant
when the output change in relevant range
◦ Example: insurance cost
• Variable Costs: relevant to the level of volume
◦ Example: fuel cost
• Mixed cost: semi-variable cost
◦ Example: depreciation, power consumption
• Average Unit Cost: activity cost per unit
◦ The variable cost per unit is constant
◦ Fixed cost per unit varies with the change in volume
◦ The mixed cost per unit varies as volume change

Cost classification – Example

• Consider the cost data of owning and operating a
typical passenger car in a company (table below)
• Requirement
◦Classify the cost: done
◦Group work: Develop a cost-volume chart and calculate the
average cost per mile as a function of annual mileage
(Suggestion: consider volumes level of 5000 miles, 10,000
miles, 15,000 miles and 20,000 miles)

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Cost classification – Exercise 1

Cost Reference Value ($) Cost Classification (VC, FC, MC)
Standard miles per gallon 20 miles/gallon
Average fuel price per gallon $1.34/gallon
Fuel and oil per mile ?????
Maintenance per mile 0.0360
Tires per mile 0.0141
Insurance- comprehensive 90
Insurance – collision 147
Insurance – Body injury &property damage 460

License & registration 95

Property tax 272
Depreciation – fixed portion per year 3106
Depreciation – variable portion per mile 0.04

Break-even volume analysis

• Difference cost: The difference in costs between two
alternatives.
◦ Change in variable cost
◦ Fixed cost change only the volume be outside of relevant range
• Break-even volume is the point that the company change from
one option to another

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Exercise 2:
A company has manufacturing plants operating on a single-shift 5-day week. The plant is
operating at its full capacity (24,000 units of output per week) without the use of
overtime or extra-shift operation. Fixed costs for single-shift operation amount to
$90,000 per week. The average variable cost is a $30 per unit, at all output rates, up to
24,000 units per week. The company has received an order to produce extra 4,000 units
per week beyond the current single-shift maximum capacity. Two options are being
considered to fill the new order:
Option 1: increase the plant’s output to 36,000 units a week by adding overtime
or by adding Saturday operations or both. No increase in fixed costs is entailed, but the
variable cost is $36 per unit for any output in excess of 24,000 units per week, up to
36,000-unit capacity.
Option 2: Operate a second shift. The maximum capacity of the second shift is
21,000 units per week. The variable cost on the second shift is $31.5 per unit, the fixed
costs of operating a second shift is $13,500 per week.
Determine the range of operation volume that will make option 2 profitable

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Cost classification
• Opportunity Cost: potential benefit given up as seeking an alternative
option

• Sunk Cost: cost has been incurred by past action

• Marginal Costs: added cost resulting from increasing the rate of output
by a single unit

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Exercise
• Exercise 3: You have a part-time job that pay you $200 per week.
You would like to spend a week at the beach during spring break
and your employer has agreed to give you the week off. Name the
cost and determine the value of cost.
• Exercise 4: You have an old car and want to sell. The market value
would be about $1,200 at best. While you are in the process of
advertising the car, you find that the car’s water-pump is leaking.
You decided to have the water-pump repaired, which cost $200. A
friend of yours is interested in buying your car, and has offered
$1,300. Would you take the offer? Or, decline the offer just because
you cannot recoup the repair cost with that offer. What kind of cost
you determine in this case?

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• Exercise 5: Consider a company that purchases electricity at

the following rates. In this table, the unit variable cost in each
rate class represents the marginal cos per kWh. Suppose that
the current monthly consumption of electricity averages 3,200
kWh. Determine the marginal cost of adding one more kWh
and for the given operating volume (3,200 kWh), the average
cost per kWh.
kWh/mont First 1,500 Next 1,250 Next 3,000 All over
h 5,750
$/kWh 0.050 0.035 0.020 0.010

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Revenue
• Revenue is the total amount of income generated by the sale
of goods or services related to the company's primary
operations.
R = Q*P

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Time is money
• Interest: the cost of money
◦ Definition: a percentage that is periodically applied and added to an amount money
over a specified length of time. OR the cost of having money available for use.
◦ Example: A current annual interest rate is 10%. Amount of current money is $1
billion. After a year, the future amount of money is $1.1 billion. That is, $1 million
will earn $100,000 in interst in a year.
◦ Exercise 6:
◦ Amount of money: P = $200,000
◦ Annual Interest rate i = 10%
◦ How much is interest (I) after 1 year ?
◦ How much is amount of money (F) after 1 year?

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Time is money
• Elements of Transaction Involving Interest
◦ Principal (P): An initial amount of money in transactions
◦ Interst rate (i): The cost or price of money and is expresssed as a percentage
per period of time
◦ The interest period: a period of time detemines how frequently interst is
calculated (year, month, quarter)
◦ Number of interst periods (N)
◦ A plan for receipts or disbursements: a particular cash flow pattern over a
specified length of time (for example:series of equal monthly payments that
repay the loan)
◦ A future amount of money (F): the amount of money results from cumulative
effects of interst rate over a number of interest periods

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Time is money
• Example:
◦ An electronic manufacturing company buys a machine for $25,000 and
borrow $20,000 from the bank at a 9% annual interest rate. The
company pays $200 loan fee when the loan commences. The bank
offer two repayment plans, one with equal payments made at the end of
every year for the next 5 years, and the other with equal payments made
at the end of every year for the next 5 years. These payment plans are
summarized in table below.

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End of Year Receipts Payment Payment

Plan 1 Plan 2

Year 0 $20,000 $200.00 $200.00

Year 1 5,141.85 0

Year 2 5,141.85 0

Year 3 5,141.85 0

Year 4 5,141.85 0

Year 5 5,141.85 30,772.48

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Time is money
• In Plan 1 the principal amount, P, is $20,000, and the interest
rate, i, is 9%. The interest period is 1 year, and the duration of
the transaction is 5 years, which means there are five interest
periods (N=5). The disbursements planned over the duration
of this transaction yield a cash flow pattern of five equal
payments, A, of $5,141.85 each, paid at year-end during years
1 through 5.
• Plan 2 has most of the elements of Plan 1, except that instead
of five equal repayments we have a grace period followed by
a single future repayment, F, of $30,772.78.

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Time is money

• Methods of Calculating Interest

◦ Simple Interest:
I = (iP)N
F = P + I = P (1+iN)
◦ Compound Interest:
End of period 1: P+iP = P(1+i)
End of period 2: P(1+i)+i[P(1+i)]=P(1+i)(1+i)=P(1+i)2
End of period 3: ????????
F= ?????

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Time is money
• Types of Cash Flow
◦ Single Cash Flow
◦ Equal (uniform) Series
◦ Linear Gradient Series
◦ Geometric Gradient Series
◦ Irregular Series

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Time is money
• Single Cash Flow Formulas
◦ Given a present sum, P, invested for N interest periods at interest rate, i,
what sum will have accumulated at the end of the N periods (F)?

F = P(1+i)N
F = P(F/P,i,N)
(F/P,i,N): Single payment Compound amount factor
(F/P,i,N) = (1+i)N
◦ Example: P = $20,000, i = 12%, number of periods is 15. Find F
◦ Cash flow
◦ Know P, i, N -> F?

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• Given a future value, F after N interest periods at interest rate, i, what

is the present value invested in present (P)?
◦ = = ( / , , )
( )
◦ (P/F,i,N): single payment present worth factor
◦( / , , )=
( )

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• Equal payment Series

( )
• = = ( / , , )

Equal payment series/ uniform series compound amount

( )
factor: ( / , , ) =

• = ( )
= ( / , , )

Sinking-Fund Factor: ( / , , ) = ( )

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• Equal payment Serie

( )
• = = ( / , , )
( )
Equal payment series present worth factor: ( / , , ) =
( )
( )
( )
• = = ( / , , )
( )
Capital Recovery Factor/Annuity Factor: ( / , , ) =
( )
( )

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Project cash flow

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Depreciation
• Asset Depreciation
• Fixed assets are used to provide the future cash flows. For example:
Equipment, machines, etc.
• Depreciation is defined as the gradual decrease in utility of fixed assets
with use and time.
◦ Physical depreciation: a reduction in an asset’s capacity to perform its intended
service due to physical impairment. (interaction with environment or because of
using)
◦ Functional depreciation occurs as a result of changes in the organization or in
technology that decrease or eliminate the need of an asset.
• Economics depreciation = purchase price - market value
• Accounting Depreciation: the systematic allocation of the initial cost of
and asset in parts over a time (depreciable life)

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Depreciation
• Depreciable assets
◦ Be used in business or held for production of income
◦ Have a definite service life, and that life must be longer than 1 year
◦ Be something that wears out, decays, gets used up, loses from value from natural
causes
◦ Example: Buildings, machinery, equipment, vehicles.
• Cost basis: include the actual cost of an asset and all other incidental
expenses
• Example: Lanier Corporation purchased an automatic hole-punching
machine priced at $62,500. Lanier also paid the inbound transportation
charges of $725 on the new machine as well as labor cost of $2,150 to
install the machine in the factory. Lanier also had to prepare the site at the
cost of $3,500 before installation. Determine the cost basis for the new
machine for depreciation purpose.

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Depreciation
• Asset’s depreciable life (useful life):
◦ the number of years over which an asset is to be depreciated
◦ Base on the service life of an asset
• Government issues guideline on lives for categories of assets
• Salvage Value:
◦ an asset’s estimated value at the end of its life
◦ Be estimated when the depreciation schedule for the asset is established

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Depreciation
• Depreciation method
◦ Straight-line method: consider that the asset provides an equal amount
of service in each year of its useful life
( − )
=
◦ Dn: Depreciation charge during year n
◦ I: cost of the asset including installation expense
◦ S: Salvage value at the end of useful life
◦ N: useful life
The book value of the asset at the end of n years (Bn) = Cost basis – total
depreciation charges made to date

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Example: Consider the following automobile data

Cost basis of the asset is $10,000; useful life is 5
years, estimated salvage value is $2000. Compute
the annual depreciation allowances and the
resulting book values using the straight-line
depreciation method.

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Depreciation
• Declining Balance Method (DB)
◦ Allocate a fixed fraction of the beginning book balance each year.
The fraction α=1/N*(multiplier)
Multiplier = 2: Double Declining Balance Method
Dn= αI(1- α)n-1
◦ The total Depreciation (TDB)at the end of n years:
TDB=I[1-(1- α)n]
◦ The book value, Bn=I(1- α)n

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• Consider the following accounting information

for computer system. Cost basis of the asset is
$10,000; useful life is 5 years, estimated salvage
value is $778. Compute the annual depreciation
allowances and the resulting book values using
the double declining depreciation method.

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Depreciation
• If the final book value BN is different from salvage value (S):
◦ Case 1: BN>S: We have not depreciated the entire cost of the asset ->
switching from DB to SL when ever SL depreciation results in larger
depreciation charges. The rule is: If the depreciation by DB in any year is less
than (or equal to) I would be by SL; we should switch to and remain with the
SL method for the duration of the project’s depreciable life. The straight-line
depreciation in any year n is calculated by:
◦ Dn= (Book value at the beginning of year n – salvage value)/Remaining useful life at the
beginning of year n
Example: Consider the following accounting information for computer system.
Cost basis of the asset is $10,000; useful life is 5 years, estimated salvage value
is $0. Determine the optimal time to switch from DB to SL depreciation and the
resulting depreciation schedule.

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Depreciation
◦ Case 2: BN<S: We depreciate assets below their salvage value -> Stop depreciating the asset
whenever you get down to Bn=S.

Example: Consider the following accounting information for computer system. Cost basis of the asset
is $10,000; useful life is 5 years, estimated salvage value is $2000. Determine the depreciation in each
year.

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Corporate Income Tax

• After-tax cash flow
• The project revenue
• The project expenses
• Taxable Income = Gross income (revenues) – expenses
• Income taxes = (Tax rate) x (taxable income)
• Net income = Taxable income – income taxes

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Corporate Income Tax

Gross income
Expenses
Cost of goods sold
Depreciation
Operating expenses
___________________________
Taxable income
Income taxes
____________________________
Net income

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Developing Project Cash Flows

• Project cash flows
◦ Cash Outflows
◦ Cash Inflows
• Cash Outflows:
◦ Purchase of New Equipment
◦ Investments in Working Capital
◦ Manufacturing, Operating, and Maintenance Costs
◦ Leasing Expenses
◦ Interest and Repayment of Borrowed Funds
◦ Income Taxes and Tax Credits

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Developing Project Cash Flows

• Elements of Cash Inflows
◦ Borrowed Funds
◦ Operating Revenues
◦ Cost Saving (Cost Reduction) – For the project with purpose is to
reduce operating cost.
◦ Salvage Value

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Developing Project Cash Flows

• Projects are financed with Borrowed Funds
One payment at the end of loan period
Equal total payments per time period;
Equal principal payments per time period
• Example

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Criteria for project evaluation

• Net present value (NPV) method
NPV = ∑ /(1 + )
CFt = Bt - Ct
MARR: used as discounted rate (i= MARR)
NPV = present value of cash flows
NPV≥0: The project is attractive (worth to invest)
NPV<0: The project is not attractive
Example: A, B, C
NPVa = -100, NPVb = -150, NPVc = -1000.

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• Cost – Benefit ratio Method (B/C ratio)

∑ /( )
B/C = ∑ /( )

B/C≥1: The project is attractive (worth to invest)

B/C<1: The project is not attractive
• IRR (internal rate of return) is the value of i (discounted rate) when NPV is equal 0
IRR≥ MARR: The project is attractive (worth to invest)
IRR<MARR: The project is not attractive
MARR: Minimum attractive rate of return
A,b,c
IRRa = 10%, IRRb = 5%, IRRc = 1%
• Payback period

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Project risk and uncertainty

Sensitivity analysis
• Consider effects of the output changing on the input’s
changing
• Output: NPV, IRR
• Input: Revenue, Cost, discounted rate

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