Project Management

Chapter 1

What is a project

A project should have a definite beginning and definite end and require one or more resources in each of the separate but interrelated and independent activities which must be completed to achieve the objectives for which the project was instituted Every project has two phases
Planning phase Implementation or execution phase

Project Categorisation

Building Construction
Residential Commercial Educational Others

Infrastructure Projects
Roads, Railways and Airports Dams, Canals and Bridges Oil and Gas transmission

Industrial Projects

Manufacturing Plant
Metals Petroleum Consumer Goods etc

Factors affecting a project

Size

No of Tasks Quantity of wok Variety of tasks Similar and Dissimilar Standard Specifications

Complexity

Quality

Productivity
Ratio of planned effort divide by actual effort

Completion Time Cost

Project Environment

Details of work not properly defined Scope of work modified during execution Remote locations Geographical spread of work Resource requirement Investment involved and the risk associated

Cost overrun

Unforeseen natural calamities Engineering failures

Delay and increase in cost

Chapter 2

Elements of a Project

Objectives

Example Irrigation Project

Create irrigation potential Increase agricultural prodcution Generate employement in agri Equitable distribution of water water use efficiency

Rules Regulations and Policy restrictions

Administrative rules/policies Financial regulations Technical specifications

Elements of a Project

Management Control

Project Authority

Inputs
Materials Human Resources Equipments Money

Implementation Process
Effective coordination between dept/agencies Adhering to timelines Participation of community

Elements of a Project

Output

Achievement of the given targets

Secondary objectives fulfilment employement, income strata etc Quality of life, socio economic change. Evaluation and mid course corrections

Outcome

Impact

Feedback

State the Programmed Objectives

Indicate the Rules, regulations, constraints and restrictions Specify the Organisation structure Indicate the Inputs/Resources required

Quantity and Quality

State the arrangements to be made

Coordination Time line Peoples participation

State the expected Output or Target

State the Programmed Objectives

Specify the Outcome anticipated State the Impact the project is expected to generate.

Blue Print for the project

Project Planning & Management

Programmed Objectives If -ve Formulate Alternatives Appraisal

Implementation Planning

If +ve

Monitoring

Evaluation

Project Appraisal
A set of techniques employed to assess the return from the project over a period of time

Financial Metrics
Metrics = Measurements

The metrics in each case describe how the subject is measured and there can be many different ways to measure each subject.
Each financial metric says something different about a body of financial data. Each financial metric says something about cash flow numbers or financial statement figures. The financial metric reveals some characteristic of the whole body of data that might not be obvious from simply reviewing thefinancial figures.

The payback period cash flow metric, for instance, takes a series of cash inflows and outflows and measure the time it takes for investment returns to cover investment costs. The estimated payback periods of different potential investments can be compared, to help decide which alternative is the better investment.

Financial Metrics

The wise investor, however, will also want to see other metrics for the same investment choices, as well, such as net present value (NPV) and return on investment (ROI).

Types of Financial Metrics

Cash Flow Metrics

Net Cash Flow Payback Period (PBP) Present Value (PV) Net Present Value (NPV) Return on Investment (ROI) Internal Rate of Return (IRR)

Financial Statement Metrics

Current ratio, Earnings per share

Cash Flow Metrics

Cash flow metrics describe the value of cash flow events in various ways. They may apply to:

Single event (e.g., a cash inflow payment coming sometime in the future), A stream of cash flow events over time A company expects a certain cash inflow five years from now. What is the value today of that future inflow? The present value metric provides answer to that question A project will bring many cash inflows and outflows over the years, summarized with a net cash flow stream. Cash flow metrics such as internal rate of return help describe the cash flow value, for comparing to other actions.

Cash flow metrics address questions like:

Cash flow metrics are generally used for ...

Comparing different possible courses of action or investments. Justifying a chosen action in financial terms. Anticipating the financial consequences of an action for budgeting or planning purposes.

Cash flow metrics

Net Cash Flow

The net of incoming and outgoing cash flows, usually expressed as net cash flow per period For a series of cash flow events, the cumulative value of all cash flows through the end of the current period.

Cumulative Cash Flow

Payback Period

The amount of time required for an investment to pay for itself (the time required for cumulative inflows to balance cumulative outflows exactly).

Future Value Net Present Value

The value today of money that will not be received or paid until sometime in the future; the value today (present value) is discounted below the value the funds will have when the cash flow actually occurs in the future.

Cash flow metrics

Return on Investment (ROI)

ROI in cash flow analysis usually means a ratio or percentage, comparing an investment's incremental gains to investment costs. The interest rate that yields an net present value of 0 for a cash flow stream Usually expressed as the number of units of a product that must be sold at a given price in order for product costs to exactly equal incoming product revenues. Units sold in excess of the break even number represent net gain, or positive margin. Usually applied to expensive assets or other acquisitions, TCO is the estimated total life cycle cost brought by acquiring, installing/deploying/starting, operating, maintaining, and disposing of the item at the end of its economic life.

Internal Rate of Return (IRR)

Break Even Point

Total Cost of Ownership (TCO)

Financial Statement Metrics

Financial statement metrics are generally used by

Investors considering investment in a specific project or company. Company management, for identifying strengths, weaknesses, and target levels for business objectives. Shareholders and boards of directors, for evaluating senior management.

Types of Financial Statement Metrics

Liquidity metrics Is the company prepared too meet its short term financial obligations?

Working Capital Current Ratio Quick Ratio Accounts payable turnover (APT) Cash conversion cycle (CCC)

Types of Financial Statement Metrics

Activity and efficiency metrics Address questions such as these: Is the company using its resources efficiently?

Sales Revenues per Employee Inventory Turns Accounts Receivable Turnover Days payable outstanding (DPO) Total Asset Turnover Fixed Asset Turnover

Types of Financial Statement Metrics

Leverage metrics Designed for approaching questions like this: Are the company's funds supplied primarily by owners or by creditors

Total Debt to Asset Ratio Debt to Equity Ratios

Total Debt to Equity Ratio Long Term Debt to Equity Ratio

Types of Financial Statement Metrics

Profitability metrics: Designed to answer questions such as these:

Is the company profitable? Is itmaking good use of its assets ?

Profit Margin on Sales Operating Profit Margin Gross Profit Margin Return on total assets (ROA) Return on equity (ROE) Earnings per share (EPS)

Types of Financial Statement Metrics

Valuation Metrics: Address questions like this: What are the company's prospects for future earnings?

Price to Earnings Ratio (P/E) Book Value per Share Market to Book Ratio

Cash Flow Metrics

Net cash flow

Net Cash Flow = Sum of inflows Sum of Outflows

Cash flow is distinguished from accounting terms related to income, such as "revenues," "expenses," and "costs which do not necessarily represent real cash flow.
The two concepts are closely related, but they are not the same thing. Regulatory groups and tax authorities, allow or require companies to use conventions like depreciation and accrual accounting on the income statement. Actual cash flow gains and losses for the period are reported more directly on another reporting instrument:

Cash Flow Statement

Net cash flow

Timing Now Year 1 Year 2 Year 3 Year 4 Year 5 Total Inflows Outflows Net CF

0 40 50 75 90 100 355

100 20 30 35 30 40 225

100 20 20 40 60 60 100

Does this represent a good business decision?

Shows actual inflow and outflow figures, which are important for budgeting and business planning. Provides the basis for calculating other financial metrics, such as NPV, IRR, and payback. Is the beginning point for management actions to manage and optimize overall results.

Cumulative Cash Flow

Timing Now Year 1 Year 2 Year 3 Year 4 Year 5 Net CF Cumulative CF

100 20 20 40 60 60

100 80 60 20 40 100

Pay Back Period

The Time Duration in which the investment could be recovered

Pay Back Period

A company proposes to spend 250 Crores and there are 3 options available with returns over 10 years
Option A Option B Option C Cum Net Flow Outflow Inflow 100 -10 0 -50 80 0 -70 70 0 -90 10 -130 50 -80 100 -20 200 40 200 115 200 190 200 250 960 Net flow -100 -80 -70 10 50 100 200 200 200 200 Cum Net Flow -100 -180 -250 -240 -190 -90 110 310 510 710

Net Cum Net Net Year Outflow Inflow flow Flow Outflow Inflow flow 100 1 0 -100 -100 10 0 -10 2 80 60 -20 -120 40 0 -40 3 70 70 0 -120 50 30 -20 4 70 70 -50 60 40 -20 5 80 80 30 90 50 -40 6 80 80 110 50 50 7 80 80 190 60 60 8 90 90 280 60 60 9 90 90 370 75 75 10 90 90 460 75 75 Total 250 710 250 440

Shortest Payback period ?

Drawbacks of PBP

It ignores any benefits that occur after the payback period and, therefore, does not measure profitability. It ignores the time value of money.
Because of these reasons, other methods of capital budgeting like net present value, internal rate of return or discounted cash flow are also to be used for evaluation

Present Value
The value on a given date of a future payment or series of future payments, discounted to reflect the time value of money
Timing Now Year 1 Year 2 Year 3 Year 4 Year 5 Net CF Cumulative CF Present Value

100 20 20 40 60 60

100 80 60 20 40 100

100.00 18.52 17.15 31.75 44.1 40.84

Net Present Value

Sum of the present values (PVs) of the individual cash flows
Timing Now Year 1 Year 2 Year 3 Year 4 Year 5 Total Net CF Cumulative CF Present Value

100 20 20 40 60 60 100

100 80 60 20 40 100

100.00 18.52 17.15 31.75 44.1 40.84

NPV=52.36

Net Present Value

If... It means... the investment would NPV > 0 add value to the firm the investment would NPV < 0 subtract value from the firm Then... the project may be accepted the project should be rejected We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g. strategic positioning or other factors not explicitly included in the calculation.

NPV = 0

the investment would neither gain nor lose value for the firm

Net Present Value

Option A
Discoun ted Net Netcash Year Outflow Inflow Flow cash Flow Outflow Inflow Netcas Discounte h Flow d Net cash Flow OutflowInflow Netcash Flow Discounte d Net cash Flow

Option B

Option B

0 1 2 3 4 5 6 7 8 9 Total

100 80 70

0 60 70 70 80 80 80 90 90 90

-100 -20 0 70 80 80 80 90 90 90 460

-100.00 -18.18 0.00 52.59 54.64 49.67 45.16 46.19 41.99 38.17 210.22

10 40 50 60 90

0 0 30 40 50 50 60 60 75 75

-10 -40 -20 -20 -40 50 60 60 75 75 190

-10.00 -36.36 -16.53 -15.03 -27.32 31.05 33.87 30.79 34.99 31.81 57.26

40 60 75 75

10 10 20 20 20 30 30 30 40 75

-30 -50 -55 -55 20 30 30 30 40 75 35

-30.00 -45.46 -45.45 -41.32 13.66 18.63 16.94 15.40 18.66 31.81 -47.14

250

710

250

440

250

285

Which option management should go for ?

Return on Investment (ROI)

ROI analysis compares the magnitude and timing of investment gains directly with the magnitude and timing of investment costs. A high ROI means that investment gains compare favorably to investment costs.

Simple ROI

Net Cash Flow A Net Cash Flow B

Now 100 100

Year 1 20 70

Year 2 30 60

Year 3 40 40

Year 4 70 30

Year 5 80 20

Total 140 120

Simple ROI
For Investment A...
Investment A Cash Inflows A Cash Outflows A Net Cash Flow A Cumulative CF A Simple ROI A Now 0 100 100 100 -100.0% Year 1 40 20 20 80 66.7% Year 2 50 20 30 50 35.7% Year 3 75 35 40 10 5.7% Year 4 95 25 70 60 30.0% Year 5 105 25 80 140 62.2% Total 355 225 140

For Investment B...

Investment B Cash Inflows B Cash Outflows B Net Cash Flow B Cumulative CF B Simple ROI B Now 0 100 100 100 -100.0% Year 1 100 30 70 30 23.1% Year 2 90 30 60 30 18.8% Year 3 75 35 40 70 35.9% Year 4 50 20 30 100 46.5% Year 5 40 20 20 120 51.1% Total 355 235 120

Simple ROI
Using simple ROI as the sole decision criterion, which investment is the better business decision? The answer here is: that depends on the time period in view.

Considering the 3-year ROIs from each investment, clearly B's ROI of 35.9% is better than A's ROI of 5.7%. Considering the 5-year ROIs however, investment A clearly has the higher ROI at 62.2%, vs. 51.1% for B's five-year ROI.

Discounted ROI

Some financial specialists prefer to derive ROI from cash flow stream present values. In the "early costs / later gains"situation, using discounted cash flow figures to calculate ROI leads to a more conservative, less optimistic result

IRR

Instead of a simple ratio between inflows and outflows (as with ROI), the IRR compares returns to costs by asking: "What is the discount rate that would give the cash flow stream a net present value of 0? The interest rate that answers that question is the IRR for the cash flow stream

IRR
Timing Now Year 1 Year 2 Year 3 Year 4 Year 5 Total CASE A Net Cash Flow Present Value CASE B Net Cash Flow Present Value

100.00 60 60 40 20 20 Net CFA = 100.00

100.00 54.54 49.59 30.05 13.7 $12.42 NPVA = 60.30

100.00 20 20 40 60 60 Net CFB = 100.00

100.00 18.18 16.52 30.05 41.1 37.27 NPVB = 43.12

If the investment choice were based solely on NPV, other things being equal, the one with the higher NPV (Case A) is the better investment. You can take this as a signal that Case A will also have the higher IRR.

Calculating IRR

For Case A, an interest rate of 0.38 produces NPV = 0, whereas Case B NPV arrives at 0 with an interest rate of 0.22. Case A therefore has an IRR of 38%, Case B an IRR of 22%.

IRR Considerations

Other things being equal, the investment alternative with the highest IRR is the better investment. Generally, the higher the IRR, the better the returns relative to cost, and the lower the risk. IRR says nothing about the magnitude of the return. A tiny investment or expenditure may lead to a magnificent IRR. An alternative action with a smaller IRR might still be preferred if it brings in a much larger net cash flow. IRR cannot be calculated with outflows only, or inflows only; IRR is thus not applicable to "cost only" analyses. IRR can be quite misleading if there is no large initial cash outflow. Lease VS BUY. 2500% to 25%

ROI compared to NPV, IRR, and Payback Period

ROI compared to NPV, IRR, and Payback Period

ROI: Investment A has the higher 5-year ROI (62.2% for A vs. 51.1% for B). That is a point in A's favorif the time period in view is 5 years. Future Performance: The cumulative curves above only cover 5 years, but if the investments inflows and outflows are expected to continue beyond 5 years, the curves point to two different futures. By Year 5, A's cumulative cash flow curve is heading skyward, while B's appears to be leveling off. If there is reason to believe these patterns will continue, this is also a point in favor of A. Payback Period. The payback period for B is 1.5 years, while A's payback period is 3.14 years. Investment B "pays for itself" in half the time of investment A. The shorter payback period is preferred because it means invested funds are recovered sooner, and available for use again sooner. The shorter payback period is also viewed as less risky than the longer payback. These are points in favor of investment B.

ROI compared to NPV, IRR, and Payback Period

Net present value (NPV):

Using a 10% Discount rate, Investment B has a net present value (NPV) of 76.18, while A's NPV is 70.51. With the time value of money rationale, this means that investment B is worth more, today, than investment A, even though A will ultimately (in 5 years) return more funds. This is a point in favor of B. Investment A has an IRR of 28.9% while B's IRR is 44.9%. When investments are competing for funds, of course, the higher IRR is preferred. This is a point in favor of investment B.

Internal rate of return (IRR):

Financial Metrics

Liquidity Metrics
Current Assets: 9,609,000 Current Liabilities: 3,464,000 Inventories: 5,986,000 Accounts Payable: 1,642,000 Accounts Receivable: 1,832,000

Net sales revenues: 32,983,000 Cost of goods Sold: 22,043,000

Working Capital Working capital = Current assets Current liabilities = $9,609 5986 = 3,623

How much working capital is sufficient?

Company management will attempt to address that question by projecting their current liabilities for the next year and the expected cash inflows for the next year.

Current Ratio Current ratio = Current assets / Current liabilities = 9,609 / 5986 = 1.61

Current ratio value of 2.0 is a generally used "rule of thumb" requirement for healthy liquidity. Current ratio under 1.0 might be considered cause for alarm

Quick Ratio

Quick ratio = (Current assets Inventories ) / (Current liabilities) = (9,609 3,464) / 5986 = 1.03
Quick ratio of 1.1 is considered healthy

Accounts Payable Turnover

APT = Cost of goods sold / Accounts payable = 22,043,000 / 1,642,000 = 13.4 payoffs/year
Lower APT means the company is getting good credits Higher APT means the creditors are not willing to give credit

Cash Conversion Cycle (CCC)

How long does it take the company to turn its own cash investments (cash paid to suppliers) into incoming cash from customers?

CCC = DIO + DSO DPO

CCC is tracked over time for the same company and for competitors

Shorter CCC indicate improved management efficiency and improved liquidity.

Project Implementation Planning

Steps

Step 1

List all the activities to be implemented

Large scale projects More than one deptt List activities deptt wise This is called Work Breakdown Structure (WBS)

Step 2
Specify a logical sequence of activities Serial order Parallel or Concurrent

Step 3

Work out duration for every activity

Steps

Step 4
Assemble the activities in a flow diagram Network plan

Step 5

Analyse the Flow Diagram

An Example
Setting up a Milk Chilling plant The plan needs to be approved by the Project Authority There is a building available, minor modifications required Staff to be recruited and trained. The training needs to be organised in another chilling plant New power line required. Wiring would be done only after the approval by the electricity board After installation, staff is trained and wiring done. A pilot test needs to be run

Step 1
List all the activities
Activity Code Activity Description A Project Plan Approval B Recruit Staff C Purchase the Plant & Machinery D Obtain Approval for New Power Line E Train the Staff recruited F Install the Plant & Machinery G Electrical Wing H Pilot Run

Is it a complete Plan ?

Step 2

Specify a logical sequence

Activity Code Activity Description Immediate Predecessor A Project Plan Approval None B Recruit Staff A C Purchase the Plant & Machinery A D Obtain Approval for New Power Line A E Train the Staff recruited B F Install the Plant & Machinery C G Electrical Wing D H Pilot Run EFG

Step 3

Work out the duration of time for each activity

Based on previous experience in similar project Using a standard norm Statistical method after collecting information

Step 3
Source Days 1 12 2 6 3 8 4 9 5 10 6 6 7 22 Source 8 9 10 11 12 13 14 Days 13 12 14 6 8 2 10 Source 15 16 17 18 19 20 21 Days 9 8 12 10 6 12 8 Source 22 23 24 25 26 27 28 Days 9 7 11 6 5 6 20 Source 29 30 31 32 33 34 35 Days 8 6 6 8 12 6 10

Minimum Time (Optimistic) Top MaximumTime (Pessimistic) Tpe Majority Time (Most Likely) - Tml

Time Estimated =

Top + 4 Tml + Tpe 6

What is the Time estimated in the given example ?

Step 3

Time Estimates of Activities

Activity Immediate Duration Activity Code Activity Description Predecessor (Months) A Project Plan Approval None 2 B Recruit Staff A 3 C Purchase the Plant & Machinery A 5 D Obtain Approval for New Power Line A 2 E Train the Staff recruited B 2 F Install the Plant & Machinery C 4 G Electrical Wiring D 2 H Pilot Run EFG 1

Step 4

Flow of Activities
A B

Building Construction

Approval

Equipment Buying

Staff Recruitment

Burst Event

Step 4
Merge Event

Examples ?

Step 4
A B

Parallel Activities

Dummy Activity

Dummy Activities Dummy activity is only a notation or a symbol and does not consume any resources Used only to reflect the logic.
Prepare Tea Prepare Lunch

Discuss Politics

Serve Tea

Step 5 Analyse the Flow Diagram

Flow diagram has to be analysed to develop a time schedule for occurrence of events and starting as well as finishing the activities EOT - Earliest Occurrence Time LOT Latest Occurrence Time Two schedule for the Activity to Start & Finish EST Earliest Starting Time LST Latest Starting Time EFT Earliest Finishing Time LFT Latest Finishing Time

Step 5 Analyse the Flow Diagram

Activity Oriented Schedules

Schedule EOT of its Predecessor Event EST of that Activity + Its Activity Duration LOT LFT of that activity - its activity duration

Activity EST EFT LFT LST

= = = =

Calculating a Schedule

Forward Pass Method Backward Pass Method Forward Pass Method

Set the EOT of the initial event to Zero The EOT of the Next event will be EOT of the Previous event and the time estimated Some events can be reached through more than one path and in such a case the maximum time required should be considered

Calculating a Schedule

Backward Pass Method

Set the Latest Occurrence time of the Final Event. Then calculate the the Latest Occurrence Time by taking the difference between the LOT of last event and the time estimate.

Starting & Finishing Time Schedule

ACTIVITY EST EFT ACTIVITY DURATION LST LFT A 0 2 2 0 2 B 2 5 3 6 9 C 2 7 5 2 7 D 2 4 2 7 9 E 5 7 2 9 11 F 7 11 4 7 11 G 4 6 2 9 11 H 11 12 1 11 12

Starting & Finishing Time Schedule

E 9,5 B 0,0 A 2 2,2 3 C 5 7,7 F 4 11 , 11 H 1 12 , 12

11 , 7

D
2

9,4

G 2

11 , 6

Float and Critical Activities

Float = LST EST Critical Path = When Float is Zero

Task ID A B C D E F G H Float 0 4 0 5 4 0 5 0

Advantages of Making this Plan

The PM can systematically estimate the time required to complete the project The point at which coordination is required between departments can be established Resource Planning can be worked out from this project Reducing the Project Time )Network Crashing) can be planned Monitoring the progress (Network Base Monitoring) can be done.

Excercise

Project Making a Lawn

Need to prepare a lawn.

Land is Available Grass and Shrubs to be bought and planted Sprinkler system to be bought and installed Boundary wall to be made

Step 1
List all the activities

Activity Code A B C D E F G H I

Activity Description Design Land Scape Buy Grass and Shrubs Prepare Soil Buy Sprinkler System Install Sprinkler System Plant Grass Plant Shrubs Build Fence Paint Fence

Step 2

Specify a logical sequence

Immediate Activity Code Activity Description Predecessor A Design Land Scape None B Buy Grass and Shrubs A C Prepare Soil A D Buy Sprinkler System A E Install Sprinkler System D F Plant Grass B,C G Plant Shrubs B,C H Build Fence A I Paint Fence H

Step 3

Time Estimates of Activities

Activity Immediate Duration Activity Code Activity Description Predecessor (Days) A Design Land Scape None 5 B Buy Grass and Shrubs A 2 C Prepare Soil A 4 D Buy Sprinkler System A 4 E Install Sprinkler System D 2 F Plant Grass B,C 3 G Plant Shrubs B,C 2 H Build Fence A 5 I Paint Fence H 2

Step 4

Flow Diagrams

Step 5

Starting & Finishing Time Schedule Flow Diagrams Float and Critical Activities

Time Scale Network

The flow diagram when drawn as per a given scale is know as Time Scale Network

Resource Allocation
Project Cost

Activity Code A B C D E F G H

Cost Remarks 10 12 850 2 Instalments 10 10 40 2 Instalments 10 8

Early Style

Resource Requirements

Early Finish Style

Quarter 1 2 3 4

Resources Cumulative 482 482 20 502 420 922 28 950

Resource Requirements

Late Finish Style

Quarter 1 2 3 4 Resources Cumulative 460 460 0 460 442 902 48 950

Late Style

Summary

Develop Time scale network as per early finish style Post the resources required for each task above activity line Compute the resources required for each unit of time Develop late finish style network Work out resources for late finish style The actual release of resources should be between the figures estimated for the two styles Develop a resource requirement curve as both the styles Use this as the control chart for monitoring

Cumulative Resource Totals

Resource

Time in months

Network Crashing

Reducing the Project Duration Need for compression could arise either well before the project execution or during execution of the project

Methods to Compress

Check the activity time estimated Check the assumptions underlying the estimates Provide more resources wherever possible Introduce as many parallel activities as possible Go in for a feasible alternative technology Introduce reward and punishment systems Divert resources from non critical projects Divert resources from non critical activities to critical activities