Exercise 1

1 As a member in the project selection team of a company, you are required to

analyze the following two projects using NPV (Net Present Value) and ROI
(Return on investment).
Details of the two projects are shown as in Tables 1 and 2:

Project A Year 1 Year 2 Year 3 Year 4

Benefits $0 $2,000 $3,000 $4,000
Costs $3,000 $2,000 $1,000 $1,000

Table 1

Project B Year 1 Year 2 Year 3 Year 4

Benefits $1,000 $2,000 $4,000 $4,000
Costs $2,000 $2,000 $2,000 $2,000

Table 2

(a) Assume that the discount rate is 10% and the discount cost start in Year 1.
Calculate the NPV and ROI for both Project A and Project B. (Please show your
detailed steps including discount factor, discounted cost and discounted benefit
calculation. Use 3 decimal places for the discount factor.)

(b) Based on (a), which project do you recommend?

(c) Discuss the advantages and disadvantages of using NPV and ROI in selecting
project. Suggest recommendation to improve the project selection procedure of
the company.
Exercise 2

Duration
Task Name (Day) Predecessor
1 Initiating 3
2 Planning 12 1
3 Executing 2
4 Web interface feature 22
5 Database Content 10
6 Web site content 5
7 Product Catalog 3
8 Ordering 5
9 Payment 5 8
10 Web site design 12 6
11 Web site implementation 20 10
12 Web site testing 10 11
13 Web site roll-out 4 12
14 Monitoring and 1
Controlling
15 Closing 3 3,14

Table 3 Draft Gantt Chart for an Book Shop Order Web Site Project

Assume that you are creating a WBS,

a discuss the relationship between the WBS and other scope

management processes.

b the draft WBS is used for entering into the MS project as a task list in
Table 3. Draw the respective WBS as a hierarchy chart (in tree
structure). You may use task number as an item in the chart.
Answer to Ex.1:
(a)
Calculation for discount factor = 1 / (1 + discount rate)n
Discount factor for year 1 = 1 / (1 + 10%)1 = 0.909
Discount factor for year 2 = 1 / (1 + 10%)2 = 0.826
Discount factor for year 3 = 1 / (1 + 10%)3 = 0.751
Discount factor for year 4 = 1 / (1 + 10%)4 = 0.683

Discounted Benefits = Benefits * discount factor

Refer to the tables below for total discounted Benefits for Project A & Project B.

Discounted Costs = Costs * discount factor

Refer to the tables below for total discounted Costs for Project A & Project B.

Project A Year 1 Year 2 Year 3 Year 4 Total

Discount factor 0.909 0.826 0.751 0.683

Benefits $0 $2,000 $3,000 $4,000

Discounted Benefits 0 $1,652 $2,253 $2,732 $6,637

Costs -$3,000 -$2,000 -$1,000 -$1,000

Discounted Costs -$2,727 -$1,652 -$751 -$683 -$5,813

Project B Year 1 Year 2 Year 3 Year 4 Total

Discount factor 0.909 0.826 0.751 0.683

Benefits $1,000 $2,000 $4,000 $4,000

Discounted Benefits $909 $1,652 $3,004 $2,732 $8,297

Costs -$2,000 -$2,000 -$2,000 -$2,000

Discounted Costs -$1,818 -$1,652 -$1,502 -$1,366 -$6,338

NPV = total discounted benefits – total discounted costs

NPV for Project A = $6,637 - $5,813
= $824

NPV for Project B = $8,297 - $6,338

= $1,959

ROI = (total discounted benefits – total discounted costs) / discounted costs

ROI for project A = ($6,637 - $5,813) / $5,813 = 14%
ROI for project B = ($8,297 - $6,338) / $6,338 = 31%

(b) As Project B has a higher NPV and ROI, Project B is recommended.

(c) Advantages : NPV and ROI are based on financial performance and financial considerations are
often the most important aspect of the project selection.

Disadvantages : Good estimations of projected costs and benefits are difficult, and project selection should
also based on other criteria like organizational needs, problems, opportunities, etc.

Suggestion : Use models like Weighted Scoring Model or Balanced Scorecard to include more criteria in
project selection. (Ch4, S16-18)
Answer to Ex2

In scope management processes, other than the creation of the WBS, there are four processes: scope
planning, scope definition, scope verification and scope control. (Ch5, S4)

Scope planning should specify how the WBS is created and defined, how to invoke stakeholders to
maintain and approve the WBS. As the scope can be specified by the product approach and project
approach, the scope plan should specify which approach the WBS can be created in.

The scope definition results in the project scope statement which is the input for the creation of the WBS.
The project scope statement enables the decomposition of the WBS to produce the total scope of the
project.

After the creation of the WBS, the approved scope definition, WBS, and the WBS dictionary will be the
scope baseline for future scope verification. Stakeholders can verify the deliverables according to the
WBS.

Through out the project, changes are unavoidable. The change may be recognized during the WBS creation
and necessary updates to the scope definition and scope plan. The change may also be recognized during
the scope verification by stakeholders so updates to the WBS may be required.#

Book Shop Order Web

Site Project

3 14 Monitoring and
1 Initiating 2 Planning 15 Closing
Executing Controlling

4 Web interface feature 6 Web site 11 Web site 13 Web site roll-
Initiating content implementation out

10 Web site 12 Web site

5 Database Content
design testing

7 Product
8 Ordering 9 Payment
Catalog