Professional Documents
Culture Documents
Fifth Edition
Chapter 1
The World of Project
Management
Introduction
Examples of projects
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Additional 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
01-0 1-5
01-0
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Characteristics of Projects
Unique
Specific deliverables
Specific due date
Multidisciplinary
Complex
Often involve conflicts
Part of programs
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Table 1-1
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Project Budgets
Project budgeting differs from standard budgeting
in the way budgets are constructed
Budgets for non-projects are primarily
modifications of budgets for the same activity in
the previous period
Project budgets are newly created for each project
and often cover several budget periods in the
future
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Project Schedules
In manufacturing, the sequence of activities
is set when production line designed
Sequence is not altered or changed for the same
product
Globalization
When large firms establish manufacturing plants
or distribution centers in different countries, a
management team is established on site
For projects, globalization has a different meaning
Members of project teams may be spread across
countries and speak different languages
Some project team members may never have a
face-to-face meeting
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Negotiation
With little authority, the project manager
depends on negotiation skills to gain the
cooperation of departments in the
organization
Those departments have their own
objectives, priorities, and personnel
The project is not their responsibility and
the project tends to get the leftovers
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Figure 1-1
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Uncertainty
All projects are always carried out under
conditions of uncertainty
Project management is all about managing projects
uncertainty
01-
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Managing Risk
The first step in managing risk is to identify
potentially uncertain events and likelihood of
occurrence
Called risk analysis
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Figure 1-2
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Figure 1-3
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Execution
Delivery
Level of effort
Conceptualization
1. Goals
2. Specifications
3. Scope
4. Responsibilities
5. Teams
1. WBS
2. Budget
3. Resources
4. Risks
5. Schedule
1. Status reports
2. Change Orders
3. Quality Audits
4. Contingencies
1. Train user
2. Transfer documents
3. Release resources
4. Reassign staff
5. Lessons learned
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Intensity
level
Resources
Creativity
Uncertainty
Conceptual
Planning
Execution
Termination
Time
Projects Selection
Project literature shows that there are more than one hundred
tools and techniques which help the organizations in selecting
projects for its project portfolio. Each tool and technique has its
own advantages and disadvantages.
Normally, organizations do not apply only one tool or technique
but a set of tools and techniques
This requires organizations to adapt or develop a
comprehensible framework for project portfolio selection.
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Projects Selection
Screening models help managers pick winners from a pool of projects.
Screening models are numeric or nonnumeric , financial and
nonfinancial .
Screening models should have:
1. Realism: selection criteria must also be reasonable and reflect
organizational objectives, including a firms strategic goals and
mission.
2.
3.
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Projects Selection
Screening models should have:
4. Ease of use: screening models must be simple enough to be used by
people in all areas of the organization and be clear and easily
understood by organizational members.
5. Capability: screening model must allow the company to use it as
widely as possible in order to cover the greatest possible range of
project types.
6. Comparability: screening models should be broad enough to be
applied to multiple projects. A useful model must support general
comparisons of project alternatives.
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Selection Methods
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Figure 1-4
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Scoring methods
1. Unweighted 0-1 factor method
2. Weighted factor scoring method
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41
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Checklist Model
A checklist is a list of criteria applied to
possible projects.
Requires agreement on criteria
Assumes all criteria are equally important
03-
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Checklist Model
This model is very subjective, usually used in screening
projects
Terms are inexact and subject to misinterpretation or
misunderstanding.
Checklist screening models also fail to resolve trade-off
issues. What if our criteria are differentially weighted
that is, what if some criteria are more important than
others?
Checklists are valuable for screening projects, recording
opinions, and encouraging discussion
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Profile Models
Show risk/return options for projects.
X
Maximum
Desired Risk
X
Risk
Rating each
project on
criteria
X1
Minimum
Desired Return
Criteria
selection as
axes
Return
Figure 3.4
03-
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Profile Models
Show risk/return options for projects.
X
Maximum
Desired Risk
X
Risk
Efficient Frontier
X1
Minimum
Desired Return
Return
Figure 3.4
03-
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Return Potential
10
23%
6
16%
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Financial Models
Based on the time value of money principal
Payback period
Net present value
Internal rate of return
Options models
All of these models use discounted cash flows
In finance, discounted cash flow (DCF) analysis is a method of valuing a
project, company, or asset using the concepts of the time value of money. All
future cash flows are estimated and discounted by using cost of capital to
give their present values (PVs).
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Payback Period
This is one of the most common evaluation
criteria used by engineering and resource
companies.
Determines how long it takes for a project to
pay back its initial investment
Investment
Payback Period
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Advantages:
Easy to understand
Biased toward liquidity
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Example
Calculation of the payback period for a given investment proposal.
a) Prepare End of Year Cumulative Net Cash Flows
b) Find the First Non-Negative Year
c) Calculate How Much of that year is required to cover the previous period negative
balance
d) Add up Previous Negative Cash Flow Years
Initial
Investment
Alternative A
(45,000) 10,500
11,500
10
c)
0.22 = 3,00/13,500
d)
4 - 0.22
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Cash Flow
Cumulative
($200,000)
($200,000)
$75,000
($125,000)
$75,000
($50,000)
$75,000
$25,000
25, 000
3
2.67 years
75, 000
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
Divide the
cumulative amount
by the cash flow
amount in the third
year and subtract
from 3 to find out
the moment the
project breaks even.
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Ft
NPV (project) - I 0
t
t 1 (1 k )
where
I0 = The initial investment
Ft = The net cash flow in period t
k = The required rate of return or hurdle rate
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NPV Example
You are looking at a new project and have estimated
the following cash flows:
Year 0:
Year 1:
Year 2:
Year 3:
CF = -165,000
CF = 63,120
CF = 70,800
CF = 91,080
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CFt
NPV
t
(
1
R
)
t 0
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The NPV
column total is
negative, so
dont invest!
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Note that
totals are
equal, but
NPVs are
not
because of
the time
value of
money.
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ACFt
IO
n 1 (1 IRR )t
where
t
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t
t 0 (1 R )
t
t 0 (1 IRR )
n
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-250,000
50,000
100,000
200,000
Calculate the IRR for the proposed investment and interpret your
answer
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Discount Factor
B
1
0.909
0.826
0.751
Present Value
AxB
-250,000
45,450
82,600
150,200
NPV1 28,250
Discount Factor
B
1
0.833
0.694
0.579
Present Value
AxB
-250,000
41,650
69,400
115,800
NPV2 -23,150
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=R1%+
(NPV1 - NPV2)
=10%+
(28,250 - (- 23,150))
28,250 x 10%
=10%+
28,250 + 23,150
=10%+ 5.50%
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1-75
Net flow
-$40,000
Discount
1.0000
NPV
-$40,000.00
1
2
$14,000
$14,000
0.9009
0.8116
$12,173.91
$10,586.01
$14,000
0.7312
$9,205.23
$14,000
0.6587
$8,004.55
IRR 15%
-$30.30
The project doesnt meet our 17% requirement and should not be
considered further.
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Project A
Project B
-500
-400
325
325
325
200
IRR
19.43%
22.17%
NPV
64.05
60.74
The required
return for
both projects
is 10%.
Which project
should you
accept and
why?
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Options Models
NPV and IRR methods dont account for failure to
make a positive return on investment. Options
models allow for this possibility.
Options models address:
1. Can the project be postponed?
2. Will future information help decide?
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Project Screening
Process
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Cost: Projects with lower development costs have less upfront risk.
Opportunity: big payout is a strong incentive for funding.
Top management pressure: Political pressure (pet projects)
Risk: payouts must justify some level of acceptable risk-too risky are scratched.
Strategic fit: opportunities are evaluated in terms of their complementarity
either their strategic fit with existing product lines or their ability to augment the
current product family.
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Review: Projects selected for the firms portfolio are the ones that,
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Project Portfolio
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Categories of Projects
Derivative projects: those that are only
incrementally different from existing offerings
Platform projects: major departures from existing
offerings
The next generation
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Copyright
Copyright 2014 John Wiley & Sons, Inc.
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