Unit-I

Introduction to
Project management
 What is a project?
• A definitive deliverable (objective and goal)
• Takes time
• Consumes resources
• Definite starting and stopping dates
• Is broken up into tasks (activities, steps)
• Consists of processes
• Proceeds through milestones
• Utilizes teams
• Based on personal integrity and trust
 What is a project

• A project is a group of unique, inter-related

activities that are planed and executed in a
certain sequence to create a unique product and
services within a specific time frame,& budget.
• A collection of linked activities, carried out in an
organized manner, with a clearly defined START
POINT and END POINT to achieve some specific
results desired to satisfy the needs of the
organization at the current time
 Definitions
• A project is a unique venture with a beginning
and an end, conducted by people to meet
established goals within parameters of cost,
schedule and quality. Buchanan & Boddy 92

• Projects are goal-oriented, involve the

coordinated undertaking of interrelated activities,
are of finite duration, and are all, to a degree
unique. Frame 95
Define S.M.A.R.T. Project Objectives
• S pecific- Be specific in defining and targeting
an objective
• M easurable-Establish a measurable
indicator(s) of progress
• A ssignable-Objective is assignable to one
person for completion
• R ealistic-States what can realistically be
done with available resources
• T ime related-States when the objective can
be achieves (duration)
 Project characteristics
• Unique activities
• Attainment of specific goal
• Sequence of activities
• Specified time
• Interrelated activities
 Project Success

Customer Requirements Completed within allocated

satisfied/exceeded time frame

Completed within allocated Accepted by the customer

budget
 Project Failure

Scope Creep Poor Requirements Gathering

Unrealistic planning and Lack of resources

scheduling
 Triple Contraint

Time

Quality
Cost Scope
 Triple Contraint
• Increased Scope = increased time + increased
cost

• Tight Time = increased costs + reduced scope

• Tight Budget = increased time + reduced

scope.
 Project Management Entail
• Planning: is the most critical and gets the
least amount of our time
Beginning with the End in mind-Stephen Covey
• Organizing: Orderly fashion
(Contingent/Prerequisites)
• Controlling: is critical if we are to use our
limited resources wisely
• Measuring: To determine if we accomplished
the goal or met the target?
Importance of project management
1. Organizing Chaos
2. Managing Risk
3. Managing Quality
4. Managing Change
5. Clearing Issues
6. Retaining and Using Knowledge
7. Learning From Failure
 Types of projects

• On the basis of nature

1.Quantifiable projects
2.Non –quantifiable projects
 Types of projects
• On the basis of objectives
Profit oriented projects
1. New projects
2. Expansion projects
3. Modernization projects
4. Replacement projects
5. Diversification projects
Service oriented projects
1. Research and development
2. Welfare projects
3. Educational projects
4. Prestige project
Purpose oriented projects
1. Maintenance projects
2. Balancing projects
3. Rehabilitation projects
 Types of projects

• On the basis of environment

1. Commercial projects
2. Government projects
3. Military projects
Project Life Cycle
 STAGE 1:
Conceptualizing-
and-Defining

STAGE 2:
Planning-and-
Budgeting

STAGE 3:
Executing

STAGE 5:
Terminating-and-
Closing

STAGE 4:
Monitoring-and-Controlling
 Project Life Cycles
Man Hours

Conceptualization Planning Execution Termination

Project Life Cycle Stages
 Project Life Cycle

5. Requirements
 Project Life Cycles and Their Effects
Client Interest

Project Stake

Resources

Creativity

Uncertainty

Conceptualization Planning Execution Termination

 Project Selection

 Project selection is the process of evaluating individual projects

or groups of projects, and then choosing to implement some set
of them so that the objectives of the parent organization will be
achieved.
 Managers often use decision-aiding models to extract the
relevant issues of a problem from the details in which the
problem is embedded.
 Models represent the problem’s structure and can be useful in
selecting and evaluating projects.
 Models do not give any decision, it partially represent the
reality.
 Criteria of Project Selection Models

 Realism - reality of manager’s decision

 Capability- able to simulate different scenarios and optimize the
decision
 Flexibility - provide valid results within the range of conditions
 Ease of Use - reasonably convenient, easy execution, and easily
understood
 Cost - Data gathering and modeling costs should be low relative to
the cost of the project
 Easy Computerization - must be easy and convenient to gather,
store and manipulate data in the model
Project Feasibility Study
 Project Selection Models: Non Numeric
 Sacred Cow - project is suggested by a senior and powerful
official in the organization
Operating Necessity - the project is required to keep the system
running
Competitive Necessity - project is necessary to sustain a
competitive position
Product Line Extension - projects are judged on how they fit
with current product line, fill a gap, strengthen a weak link, or extend
the line in a new desirable way.
Comparative Benefit Model - several projects are considered
and the one with the most benefit to the firm is selected
 Numeric Models: Profit/Profitability

Basic questions
 Is the project worthwhile financially (that is whether it will
generate sufficient cash flows to repay debt and produce a
satisfactory rate of return on investment)?
How to select the "best" project from a list of projects?

Most common measures

Net Present Value (NPV), Internal Rate of Return (IRR), Payback
Period, Return on Investment (ROI), Discounted Cash Flow.
 Payback Period

 The amount of time required to recover the initial investment that the sponsors
inject in the project.

Unrecovered cost at start of year

Payback  Year before full recovery 
Cash flow during year
Net Present Value (NPV)

 Calculate the present value of all future cash flows with the
discounting factor (MARR)
 Add all the present values of cash in-flows (cash revenues) and
subtract all the present values of cash out-flows (cash expenses)
 What we obtain is the Net Present Value or NPV
 Positive NPV means attractive financial return, and larger NPV
means more attractive project alternative.

n
Ft (Without Inflation)
NPV (project)  A 0   t
t 1 (1  k)

n
Ft
NPV (project)  A 0   t
t 1 (1  k  p t )
(With Inflation)
 Internal Rate of Return (IRR)

 IRR is defined as the value of discount rate for which NPV

is exactly zero.The calculation should be carried out using
financial calculators or computer software (like Excel)

Larger IRR indicates that the project is more attractive financially.

NPV(IRR) = 0 =
Advantages of Profit/Profitibility Models

1. The undiscounted models are simple to use and understand.

2. All use readily available accounting data to determine the cash flows.
3. Model output is in terms familiar to business decision makers.
4. With a few exceptions, model output is on an “absolute” profit/profitability scale
and allows
“absolute” go/no-go decisions.
5. Some profit models can be amended to account for project risk.
Disadvantages of Profit/Profitibility Models

1. These models ignore all nonmonetary factors except risk.

2. Models that do not include discounting ignore the timing of the cash
flows and the time–value of money.
3. Models that reduce cash flows to their present value are strongly
biased toward the short run.
4. Payback-type models ignore cash flows beyond the payback period.
5. The internal rate of return model can result in multiple solutions.
6. All are sensitive to errors in the input data for the early years of the
project.
7. All discounting models are nonlinear, and the effects of changes (or
errors) in the variables or parameters are generally not obvious to most
decision makers.
8. All these models depend for input on a determination of cash flows,
but it is not clear exactly how the concept of cash flow is properly
defined for the purpose of evaluating projects.
Project Selection Models: Scoring

Unweighted 0-1 Factor Model

Unweighted Factor Scoring Model

Weighted Factor Scoring Model

Constrained Weighted Factor Scoring Model

Goal Programming with Multiple Objectives

Unweighted 0-1 Factor Model
A set of relevant factors is selected by management and then
usually listed in a preprinted form.
One or more raters score the project on each factor, depending
whether or not it qualifies for an individual criterion.
The criteria for choices are:
 A clear understanding of organizational goals
 A good knowledge of the firm’s potential project portfolio
Advantage of this model is that it uses several criteria.
Disadvantages are that it assumes all criteria are of equal
importance and it allows for no gradation of the degree to which
a specific project meets the various criteria.
Unweighted Factor Scoring Model
This model is used by constructing a simple linear measure of
the degree to which the project being evaluated meets each of the criteria.
Often a five-point scale is used to evaluate the project.
A variant of this selection process might choose the highest scoring
project.
The criteria are all assumed to be of equal importance.
Weighted Factor Scoring Model
A weighted factor scoring model is when each of the relevant
factors selected by management is given numeric weights to reflect
the importance of each of them in the project.
The weights may be generated by any technique that is acceptable
to the organization’s policy makers.
Each project receives a score that is the weighted sum of its grade
on a list of criteria. Scoring models require:
agreement on criteria
agreement on weights for criteria
a score assigned for each criteria
Assessment Criteria Importance Weights
1. Payoff potential 4
2. Lack of risk 3
3. Safety 1
4. Competitive advantage 3
 Advantages of Scoring Models

1. These models allow multiple criteria to be used for evaluation and decision making,
including profit/profitability models and both tangible and intangible criteria.
2. They are structurally simple and therefore easy to understand and use.
3. They are a direct reflection of managerial policy.
4. They are easily altered to accommodate changes in the environment or managerial
policy.
5. Weighted scoring models allow for the fact that some criteria are more important than
others.
6. These models allow easy sensitivity analysis. The trade-offs between the several
criteria
are readily observable.
 Disadvantages of Profit/Profitibility Models

1. The output of a scoring model is strictly a relative measure. Project scores do not
represent the value or “utility” associated with a project and thus do not directly indicate
whether or not the project should be supported.
2. In general, scoring models are linear in form and the elements of such models are
assumed to be independent.
3. The ease of use of these models is conducive to the inclusion of a large number of
criteria, most of which have such small weights that they have little impact on the total
project score.
4. Unweighted scoring models assume all criteria are of equal importance, which is
almost certainly contrary to fact.
5. To the extent that profit/profitability is included as an element in the scoring model,
this element has the advantages and disadvantages noted earlier for the profitability
models themselves.
 Example#1

Seddet International is considering two major projects each of which has four year
lives. The firm has raised all of its capital in the form of equity and has never borrowed
money. This is partly due to the success of the business in generating income and
partly due to an insistence by the dominant managing director that borrowing is to be
avoided if at all possible. Shareholders in Seddet International regard the firm as
relatively risky, given its existing portfolio of projects. Other firms’ shares in this risk
class have generally given a return of 10 per cent per annum and this is taken as the
opportunity cost of capital for the investment projects. The risk level for the proposed
projects is the same as that of the existing range of activities.
 Year Cash Flow
Project S Project L
0 (1000) (1000)
1 500 100
2 400 300
3 300 400
4 100 600

(a) State which is the best project if they are mutually exclusive using NPV.
(b) Use the IRR decision rule to choose between the projects.
(c) What is the payback period for the projects.
IRRS= 14.49% IRRL= 11.79%

IRRS
IRRL
Technical Analysis in
Project Management
 Purpose
• To ensure that the project is technically feasible
in the sense that all the inputs required to set up
the project are available.

• To facilitate the most optimal formulation of the

project in terms of technology, size, location and
so on.

• Choose best alternative

 Determinants of choice of
technology/process
• Plant Capacity
• Principal inputs
• Investment outlay and production cost
• Use by other units
• Product Mix
• Latest development
• Ease of absorption
 Appropriateness of Technology
• Whether the technology utilizes the local raw
materials?
• Whether the technology utilizes local manpower?
• Whether the goods and services produced cater to
the basic needs?
• Whether the technology protects ecological
balance?
• Whether the technology is harmonious with the
social and cultural conditions?
 Technical Analysis
• Objectives and priorities ( ex. Private sectors
and public sectors)
• Product Mix
 Plant Capacity/ production
capacity
 Feasible normal capacity (FNC)
 Nominal maximum capacity(NMC)
Factors
 Technological requirement
 Input constraints
 Investment cost
 Market condition
 Resources of the firm
 Government policy
 Location and site
 Proximity to raw materials and markets
 Availability of infrastructure
 Labor situation
 Governmental policies
 Other factors: climatic conditions, general
living conditions, proximity to ancillary units,
ease in coping with pollution.
 Site selection
 Machineries and
• equipments
Plant (process) equipments, mechanical
equipments, electrical equipments, instruments,
controls, internal transportation system, and others.
• Spare parts and tools to be purchased with the
original equipments, spare parts and tools required
for operational wear and tear
• Constraints in selecting machineries and
equipments
• Procurement of plant and machinery
Environmental aspects

• surface water quality

• air quality
• seismology/geology
• erosion
• land quality
• fisheries
• forests
• terrestrial wildlife
• noise
• archaeological/historical significance
• public health
 Project charts and Layout
• General functional layout
• Material flow diagram
• Production line diagram
• Transport layout
• Utility consumption layout
• Communication layout
• Organizational layout
• Plant layout
Market potential
Analysis
 Overview

• Situational Analysis & Specifications of Objective.

• Collection of Secondary Information.
• Conduct of Market Survey.
• Characterization of the Market.
• Demand Forecasting.
• Uncertainties in Demand Forecasting.
• Market planning.

52
 Key Step in Market & Demand Analysis and
Their Inter-relationship
Collection of Demand
Secondary Forecasting
Information

Characterization of
Situational
the Market
Analysis and
Specifications of
Objectives

Market Planning
Conduct of
Market Survey
 Forecasting
Predicting the future
Qualitative forecast methods
– subjective
Quantitative forecast methods
– based on mathematical formulas
Depend on
– time frame
– demand behavior
– causes of behavior
 Demand Forecasting
Qualitative Methods
– These methods rely essentially on the judgment
of experts to translate qualitative information into
quantitative estimates
– Used to generate forecasts if historical data are
not available (e.g., introduction of new product)
– The important qualitative methods are:
• Jury of Executive Method
• Delphi Method
 Uncertainties in Demand
Forecasting
Data about past and present markets.
– Lack of standardization:- product, price, quantity,
cost, income….
– Few observations
– Influence of abnormal factors:- war, natural
calamity
 Methods of forecasting
– Inability to handle unquantifiable factors
– Unrealistic assumptions
– Excessive data requirement 56