Project Management 1

Project Management
Project Management
“If you have pride in your organization, you can get your people to
do anything” JOE PATERNO 1976 1
Project Management
Projects Introduction
“ A project is a problem
scheduled for solution.”
J M Juran
2
Project Management
A project is a series of
activities
and tasks with a specified
objective, starting and
ending
dates and resources.
3
Project Management
Project management is the process of
project
Planning and implementation to achieve:
 The specified goals and objectives,

 At the desired performance or technology
level,
 Within the time and cost constraints,
 While utilizing the allocated resources.
4
Project Management
Elements of Project Management:
 Planning
Deciding what to do
 Scheduling
Deciding when to do it
 Controlling
Assuring that the desired results are

obtained
5
Project Management
Objectives:
This section should help you
understand:
 Project justification and
prioritization techniques
 Project planning and estimation
 Monitoring and measuring
project activity
 Project documentation and
related procedures
6
Project Management
1. Project Justification & Prioritization
Projects Justification &

Prioritization
Justification and prioritization of projects is
based
upon the following methods:
 Benefit-Cost Analysis
 Return on assets (ROA)

 Return on investment (ROI)
 Net present value (NPV)
 Internal rate of return (IRR)
 Payback period
 Decision Analysis and Portfolio Analysis
7
Project Management
A. Benefit-Cost Analysis
Benefit-Cost Analysis
 An estimate based on the
project’s benefits and costs and
the timings
 Uses project’s projected revenues,
costs and net cash flows
 For approval of funds from top
management
 To maximize returns and
minimize risk
 Benefits-to-cost ratio:
Sum ($) of all benefits anticipated
Sum ($) of all costs anticipated 8
Project Management
1. Benefit-Cost Analysis
ABC Hospital’s Radiology Equipment
Project
Dr. XYZ is evaluating a new project for his

ABC
Hospital’s Radiology Equipment Project. He
has
determined that the after-tax cash flows for
the
project will be $10,000, $12,000, $15,000
and
$7,000 respectively for each of the years 1
9
Project Management
1. Return on Assets
Project
ABC Hospital
Balance Sheet
December 31, 2001
(in million of dollars)
Assets Liabilities
Current assets… $ 20,000 Current liabilities..$10,000
Fixed assets….… $ 20,000 Long term debt….$05,000
Owner's Equity…..$25,000
Total……….…….. $ 40,000 Total…………………$40,000
10
Project Management
1. Return on Assets
Project
ABC Hospital
Income Statement
December 31, 2001
(in millions of dollars)
Net Sales $
150,000
Cost of Goods Sold $
082,000
Gross Profit $
068,000
Operating Expenses $
049,000
Earning Before Interest & Taxes $
019,000 11
Project Management
2. Return on Assets
Return on Assets
A measure of the efficiency with which
management utilizes the assets of a project.
ROA = Operating Income

Total Assets
For ABC Hospital’s Project ROA= 19,000 =
0.48
40,000
ABC management has set ROA @ 60% 12
Project Management
2. Return on Investment
Return on Investment
The average annual net income from an
investment expressed as a percentage of
the
average amount invested.
ROI = Net Income

Investment
For ABC Hospital’s Project ROI= 08,000 = 0.
25
13
Project Management
Net Present Value

3. Net Present Value (NPV)
(NPV)
The net present value for a project is
defined as
the difference between the present value of
the
project’s future cash flows and its initial
investment.
n CF t
t=0 ( 1 + r )t
NPV = ∑
14
Project Management
Net Present Value

(NPV)
CF1 CF2 CFn
NPV = + + + - ICO
1 2 n
(1+k) (1+k) (1+k)
NPV = $10,000 + $12,000 + $15,000 + $10,000 +

$7,000 1 2 3 4 5
(1.13) (1.13) (1.13) (1.13) (1.13)

13%,1 13%,2 13%,3
=$10,000(PVIF )+$12,000(PVIF )+$15,000(PVIF
)
13%,4 13%,5
+ $10,000(PVIF )+ $7,000 (PVIF ) - $40,000

15
Project Management
Net Present Value

(NPV)
NPV=
$10,000(.885)+$12,000(.783)+$15,000(.693)
+
$10,000(.613)+$7,000(.543)-$40,000
NPV=
$8,850+$9,396+$10,395+$6,130+$3,801-
$40,000
NPV= -$1,428
As NPV is negative, ABC Hospital will reject the

proposal.
16
Project Management
4. Internal Rate of Return
Internal Rate of Return

The Internal Rate of Return (IRR) is that discount
rate
(r) that equates the present value of net cash
flows to
The initial investment:
CF1 CF2 CFn
ICO = + + + n
1 2
(1+IRR) (1+IRR) (1+IRR)
17
Project Management

$40,000 = $10,000(PVIF
10%, 1 )+$12,000(PVIF
10%, 2 )+$15,000(PVIF
10%,3
)+
10%, 4 10%, 5
$10,000(PVIF )+$7,000(PVIF )
=
$10,000(.909)+$12,000(.826)+$15,000(.751)+$10,000(.683)
+$7,000(.621)
=$9,090+$9,912+$11,265+$6,830+$4,347
=$41,444 (Rate is too low)
At 15% it comes out to be = $36,841 (Rate is too high) 18

Project Management

.10 $41,444
X $1,444
.05 IRR $40,000
$4,603
.15 $36,841
X = $1,444
.05 $4,603
X = 0.157 IRR= .10+.0157= .1157 or 11.57

%
19
Project Management

The management of ABC Hospital has
determined that the hurdle rate for this
project is 13%.
Should this project be accepted?
No! The Hospital will receive 11.57 % for

each dollar invested in this project at a
cost of
13%. (IRR < Hurdle Rate)
20
Project Management
5. Payback Period
Payback Period (PBP)

It is the period of time required for
the
cumulative expected cash flows
from an
investment project to equal the
initial
cash outflow.
21
Project Management
5. Payback Period

1 2 3 4
10K(b) 10K 10K 10K

10K 20K 30K 40K
40K Cumulative Inflows
(a)
PBP = a / b
= 40 /10
= 4 years
22
Project Management
5. Payback Period

1 2 3 (a) 4 5
10K 12K 15K 10K (d) 7K

10K 22K 37K(c) 47K 54K
40K Cumulative Inflows
(b)
PBP = a + (b - c) / d
= 3 + (40 – 37) / 10
= 3.3 years
23
Project Management
6. Evaluation Summary
Evaluation Summary
Method Result Criteria Decision
ROA 0.48 60% Reject
ROI 0.25 35% Reject
NPV -$1,428 Positive Reject
IRR 11.57% 13% Reject
PBP 3.3 years 3.5 years Accept
24
Project Management
B. Project Decision Analysis
Project Decision Analysis

Other Risk Factors Related to a
Project
Business Risk Insurable Risks
Factors  Property damage
 Technology  Indirect
changes consequential
 Competitors loss
 Material  Legal liability
shortages  Personnel
 Health & Safety

25
Project Management
B. Project Decision Analysis
Project Decision Analysis
Project Risk Factor=

∑{(probability of
occurrence)} x
(consequences of risk)}
26
Project Management
B. Project Portfolio Analysis
Project Portfolio Analysis

Metho Project A Project B Project C Criteria
d
ROA 0.48 0.23 0.15 .50
ROI 0.25 .08 .30 .30
NPV -$1,428 $10,428 -$500 $10,000
IRR 11.57% 9% 13% 13%
PBP 3.3 years 5 years 2.5 years 3 years
27
Project Management
Project Planning &

2. Project Planning& Estimation
Estimation
Project planning includes developing and
Analyzing the project timeline, required
Resources, and estimating of costs. The
various methods are:
 Network rules
 Program Evaluation and Review Technique
(PERT)
 Critical Path Method (CPM)
 Gantt Charts
 Work breakdown structures (WBS)
 Estimation Techniques
28
Project Management
A. Network Rules
Network Rules
 Before an activity may begin, all activities
preceding it must be completed.
 Arrows imply logical precedence only. The
length and compass direction of the arrows
have mo meaning.
 Any two events may be directly connected by
only one activity.
 Events numbers must be unique.
 The network must start at a single event, and
end at a single event.
29
Project Management
B. PERT
Program Evaluation & Review
Technique
In PERT activities are shown as a network

of
precedence relationships using activity-
on-
arrow network construction
Prerequisites:
 Include all individual tasks
 Sequence all the activities and tasks
 Estimate time for each activity
 30
Project Management
B. PERT
Technique
Critical Path
 The critical path is the sequence of tasks
which requires the greatest expected time.

Slack Time
 The slack time (S) for and an even is the latest
date an event can occur or can be finished

without extending the project (TL) minus the
earliest date an event can occur (TE). For
events on a critical path, TL=TE, and S=0.
S= TL - TE
31
Project Management
B. PERT
Technique
Advantages of PERT
 Identify interrelationships between
tasks and problem areas

 Probability of deadlines is
identified
 Evaluation of project changes
 A large project data can be simply
projected
32
Project Management
B. PERT
Technique
Disadvantages of PERT
 Its complex nature increases

implementation
 More data is required as network
inputs
33
Project Management
B. PERT
Program Evaluation & Review Technique
2 6
6
1 4
4
0 1 3 5 7 8 9 10
4 8 4 6 2 1 3
3 12
Pert Chart Example

34
Project Management
B. PERT
Program Evaluation & Review Technique

TASK ACTIVITY DURATION
0 ISO 9001 Certification Objective
0-1 Planning 4 weeks
1-2 Select Registrar 4 weeks
1-3 Write Procedures 8 weeks
1-4 Contact Consultant 3 weeks
2-6 Schedule Audit 6 weeks
3-5 Write Quality Manual 4 weeks
4-7 Consultant Advising 12 weeks
5-6 Send Manual to Auditor 1 week
5-7 Perform Training 6 weeks
6-8 Auditor Review Manual 4 weeks
7-8 Internal Audits 2 weeks
8-9 ISO Audit 1 week
9-10 Corrective Action 3 weeks
10 Certification Milestone
PERT Chart Tasks and Durations 35
Project Management
B. PERT
Technique
PATH TOTAL TIME

0-1-2-6-8-9-10 22 weeks
0-1-3-5-6-8-9-10 25 weeks
0-1-3-5-7-8-9-10 28 weeks
0-1-4-7-8-9-10 25 weeks
Comparison of Possible Event Paths

36
Project Management
B. PERT
Technique
Calculating the Slack Time
What is the slack time for event 6?
S = TL – TE = 20 – 17 = 3
37
Project Management
C. Critical Path Method
Critical Path Method (CPM)

In PERT activities are shown as a network of
precedence relationships using activity-on-node
network construction.
Unique Features:
 The emphasis is on activities
 The time and cost factor for each activity is

considered
 Only activities on the critical path are
considered
 Activities with the lowest crash cost (per
incremental time savings) are selected first
 As an activity is crashed, it is possible for a
new critical path to develop
38
Project Management

Prerequisites:
 Each activity has a normal cost and
time
 To crash means to apply more
resources to complete the activity in a

shorter time (time while cost )
 The incremental cost per time saved to
crash each activity on CP is calculated

 The activity with the lowest ICPTS
39
Project Management
B.4 E.6 J.4

H.1
A.4 C.8 F.4 I.6 K.2 L.1 M.3
D.3 G.12
CPM Example
40
Project Management

TASK ACTIVITY DURATION COST COST/
weeks $ WEEK
0 ISO 9001 Certifiction Normal Crash Normal Crash CRASH
A Planning 4 3 2000 3000 1000
B Select Registrar 4 3 1000 1200 200
C Write Procedures 8 6 12000 15000 1500
D Contact Consultant 3 1 500 700 100
E Schedule Audit 6 5 200 1000 800
F Write Quality Manual 4 3 800 1200 400
G Consultant Advising 12 9 9600 14400 1600
H Send Manual to Auditor 1 1 100 100 x
I Perform Training 6 4 9000 12000 1500
J Auditor Review Manual 4 3 1000 1250 250
K Internal Audits 2 1 600 750 150
L ISO Audit 1 1 10000 10000 x
M Corrective Action 3 2 1600 2000 400
Time-Cost Detail for CPM Example
41
Project Management

The cost and project’s total duration
if
done in a normal manner:
A-C-F-I-K-L-M
Time: 4+8+4+6+2+1+3 = 28
weeks
Cost:
2000+1000+12000+500+200+
42
Project Management

To complete the project in 27 weeks:
 Crash activity K at $150/week. So the
cost to $48,550 and duration to 27

weeks
To further reduce the project to 26 weeks:
 Next crash activity F or M @ $400/week,
the cost will to $48,950
43
Project Management

TASK Sequence of Total COST Total
Crash Activities Duration $ Cost
ISO 9001 Certification WK SAVE Normal Crash $
Normal 28 0 48400
K Internal Audits 27 1 600 750 48550
F Write Quality Manual 26 1 800 1200 48950
M Corrective Action 25 1 1600 2000 49350
A Planning 24 1 2000 3000 50350
C Write Procedures 22 2 12000 15000 53350
D Contact Consultant 22 0 500 700 53550
I Perform Training 20 2 9000 12000 56550
J Auditor Review Manual 20 0 1000 1250 56800
B Select Registrar 20 0 1000 1200 57000
10 Schedule Audit 20 0 200 1000 57800
G Consultant Advising 20 0 9600 14400 62600
H Send Manual to Auditor 20 0 100 100 62600
L ISO Audit 20 0 10000 10000 62600
Priority Arrangement of CPM Activities 44
Project Management

The next activity to be crashed is A
at the
cost of $1,000/week. After task C is
crashed, there are two critical paths,
A-C-F-I-K-L-M and A-D-G-K-L-M, each
23 weeks long. Both D and I must be
crashed to shorten the critical path.
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Project Management
B.4 E.6 J.4

H.1
A.3 C.6 F.3 I.6 K.1 L.1 M.3
D.3 G.12
1. Crash K by 1 week = 27 weeks

2. Crash F by 1 week = 26 weeks
3. Crash A by 1 week = 25 weeks
4. Crash C by 2 weeks = 23 weeks
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Project Management
B.4 E.6 J.3

H.1
A.3 C.6 F.3 I.3 K.1 L.1 M.3
D.0 G.12
After task I is crashed, there are four critical paths,
each 20
weeks long:
 A-B-E-J-L-M
 A-C-F-H-J-L-M
 A-C-F-I-K-L-M
 47
Project Management
CPM Time-Cost Trade-off

65000
Crashing activities beyond the
activity I, increases cost without
reduction in time
60000
Cost ($)
55000
50000
45000
18 20 22 24 26 28 30
Time (weeks) 48

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Project Management

 The specified goals and objectives,

Assuring that the desired results are

 Monitoring and measuring

Projects Justification &

 Return on assets (ROA)

Dr. XYZ is evaluating a new project for his

ROA = Operating Income

ROI = Net Income

Net Present Value

Net Present Value

NPV = $10,000 + $12,000 + $15,000 + $10,000 +

(1.13) (1.13) (1.13) (1.13) (1.13)

+ $10,000(PVIF )+ $7,000 (PVIF ) - $40,000

Net Present Value

As NPV is negative, ABC Hospital will reject the

Internal Rate of Return

Internal Rate of Return

=$41,444 (Rate is too low)

At 15% it comes out to be = $36,841 (Rate is too high) 18

Internal Rate of Return

X = 0.157 IRR= .10+.0157= .1157 or 11.57

Internal Rate of Return

Should this project be accepted?

No! The Hospital will receive 11.57 % for

Payback Period (PBP)

Payback Period (PBP)

10K(b) 10K 10K 10K

Payback Period (PBP)

10K 12K 15K 10K (d) 7K

ROA 0.48 60% Reject

ROI 0.25 35% Reject

NPV -$1,428 Positive Reject

IRR 11.57% 13% Reject

PBP 3.3 years 3.5 years Accept

Project Decision Analysis

 Health & Safety

Project Decision Analysis

Project Risk Factor=

Project Portfolio Analysis

ROI 0.25 .08 .30 .30

NPV -$1,428 $10,428 -$500 $10,000

IRR 11.57% 9% 13% 13%

PBP 3.3 years 5 years 2.5 years 3 years

Project Planning &

 Program Evaluation and Review Technique

 Work breakdown structures (WBS)

In PERT activities are shown as a network

 Sequence all the activities and tasks

 Estimate time for each activity

which requires the greatest expected time.

date an event can occur or can be finished

tasks and problem areas

 A large project data can be simply

 Its complex nature increases

Program Evaluation & Review Technique

Pert Chart Example

Program Evaluation & Review Technique

PATH TOTAL TIME

Comparison of Possible Event Paths

Calculating the Slack Time

What is the slack time for event 6?

Critical Path Method (CPM)

 The time and cost factor for each activity is