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Programme Management and

Project Evaluation
Programme Management
• One definition:
‘a group of projects that are managed in a co-
ordinated way to gain benefits that would not
be possible where the projects to be managed
independently’

Ferns Steven
Strategic Programmes
• Several projects together can implement a single
strategy.
• For example :
• Two organizations are merging
• So we have to create unified pay roll and accounting application.
• Physical reorganization of offices
• Training, new org. procedures, re-creating corporate image using
media
• All of these projects can be treated as separate project
• But would be coordinated as a program

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Business cycle programmes
• Portfolio???
• The collection of projects that an organization
undertakes within a particular planning cycle
is sometimes refers to as a portfolio.
• Planners needs to assess the comparative
value and urgency of projects within a
portfolio.

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Infrastructure programmes
• Some organizations have different departments
for different activities with communication as a
basic requirement among them.
• So it is required to have a uniform infrastructure
to share the information among different
departments.
• In this situation infrastructure program setup and
maintain
– ICT infrastructure,
– include the networks, workstation and server.

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Research and development
programmes
• A search for knowledge
• R&D programmes are carried out by the
innovative companies.
• These company develops new products for
market.
• There is always high risk associated with these
type of programmes.
• Companies doing R&D
– IBM, APPLE ,MS, Google, Yahoo

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Innovative partnerships
• Some technological developments benefits
whole industries.
• In these type of programmers companies
comes together to develop new technologies

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Allocation of Resource
• What is a project?
• What is Resource?
• Resources may be:
– Programmers
– Skilled resources
– Infrastructure (PC, Network, Server, Work stations etc)
– Mangers

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Cont…
• One resource may be needed by different
project
• So we need to identify the priority of the
project
• We can delay the start of activity of a project
with least priority.

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Project Evaluation
• Evaluation of individual projects
– How the feasibility of an individual project can be
evaluated.
1. Technical assessment
– Whether the required functionality can be
achieved with current affordable technologies.
– Organizational policies
– H/W S/W infrastructure limitations
– Cost of technology adapted
Project Evaluation
2. Cost-benefit analysis
– Is the proposed project is the best of several
options?
3. Cost-benefit analysis comprises two steps-
1. Identify costs and benefits of
• Developing costs
• Operating costs
• Benefit expected from the new system
2. Expressing above costs in common units
• Express cost and benefit in terms of a common unit
Benefits management

• In Benefit management, we
– identify,
– optimise and
– track the benefits.
• To carry this out, you must:
– Define expected benefits
– Analyse balance between costs and benefits
– Plan how benefits will be achieved
– Allocate responsibilities for their achievement
– Monitor achievement of benefits

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Cost-Benefit Evaluation Techniques
• Net Profit
• Payback Period
• Return on Investment (ROI)
• Net Present Value
• Internal rate of return
Net profit

• Net Profit = (Total income) – (Total cost)


– Over the life of the project

• Estimation for more distant future are less


reliable than short term estimation.

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Net profit

• Year 0 represents all the costs before system is operation


• Net profit value of all the cash-flows for the lifetime of the
application
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Pay back period
• The length of time required to recover the cost of an
investment.
• It is time taken to break even or pay back the initial
investment.
• Advantage: Easy to calculate
• Not sensitive to small forecasting errors
• Disadvantage: Ignores overall profitability of
project

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• Year Cash Flow Net Cash Flow
• 0 -1000 -1000
• 1 500 -500
• 2 400 -100
• 3 200 100
• 4 200 300
• 5 100 400
• Notice that after two years the Net Cash Flow
is negative (-1000 + 500 + 400 = -100) while
after three years the Net Cash Flow is positive
(-1000 + 500 + 400 + 200 = 100). Thus the
Payback Period, or breakeven point, occurs
sometime during the third year.
• If we assume that the cash flows occur
regularly over the course of the year, the
Payback Period can be computed using the
following equation:
Pay back period

Year Cash-flow
Net cash flow
0 -100,000 -100,000
1 10,000 -90,000
2 10,000 -80,000
3 10,000 -70,000
4 20,000 -50,000
5 100,000 50,000 20
Return on investment (ROI)
Return on investment (ROI) is the concept of
an investment of some resource having a
benefit to the investor. A high ROI means the
investment gains compare favorably to
investment cost.
• Compares net profitability with investment
required.
ROI = Average annual profit
Total investment X 100

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– return on investment (%) = (Net profit /
Investment) × 100
• Net profit=gross profit-expenses.
• investment= stock+market outstanding+claims
or
– return on investment = (gain from investment -
cost of investment) / cost of investment.
• Lets say you buy something for Rs. 10000/- and sell it for Rs.
10200/- after a month then the profit you made in one month
is Rs. 200/-
• So return on investment = 24%

Let me explain how:

Returns per month = Rs. 200

Formula for ROI = (Profit * 100) / (Investment * no. of years)

==> ROI = 20000 / (10000 * 0.083)

1 Month in terms of years = 0.083 (1/12)

therefore ROI = 24%

This ROI is the gross ROI.


• For example, an investor buys $1,000 worth
of stocks and sells the shares two years later
for $1,200. The net profit from
the investment would be $200 and
the ROI would be calculated as follows:
• ROI = (200 / 1,000) x 100 = 20%
Return on investment (ROI)
• Disadvantages
– No account of timing of cash flow
– It has no relationship with the interest charged by
the bank.

– Advantage: Easy to calculate

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Net present value
• NPV is a project evaluation technique that
takes into account the profitability and timing
of the cash flows.

• Money now is more valuable than money later on.


• Why? Because you can use money to make more
money!
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• Net Present Value (NPV): To be a Net Present
Value you also need to subtract money that
went out (the money you invested or spent):
• Add the Present Values you receive
• Subtract the Present Values you pay
• Net present value (NPV) is the present value
of an investment's expected cash inflows
minus the costs of acquiring the investment.
• The formula for NPV is:

• NPV = (Cash inflows from investment) – (cash


outflows or costs of investment)
• NPV = R ×1 − (1 + i)^-n
• i− Initial Investment in the above formula,
R is the net cash inflow expected to be
received each period;
i is the required rate of return per period;
n are the number of periods during which the
project is expected to operate and generate
cash inflows.
• Example: You invest $500 now, and get back $570 next
year (interest Rate is 10%)
• Money Out: $500 now
• You invested $500 now, so PV = -$500.00
• Money In: $570 next year
• PV = $570 / (1+0.10)1 = $570 / 1.10 = $518.18 (to
nearest cent)
• The Net Amount is:
• Net Present Value = $518.18 - $500.00 = $18.18
• So, at 10% interest, that investment is worth $18.18
• A Net Present Value (NPV) that is positive is good (and
negative is bad).
NPV
• Greater the NPV, better is the project
Internal rate of return

• Internal rate of return (IRR) is the discount


rate that would produce an NPV of 0 for the
project
• Can be used to compare different
investment opportunities
• Calculated using spreadsheet or manually
by trial and error that provide approximate
value.

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Dealing with uncertainty: Risk Evaluation

• Every project involves risk of some form.


• Project A might appear to give a better return
than B but could be riskier
• How to choose ?????

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Risk Evaluation
1. Risk Identification and Ranking
– One technique is, to draw risk matrix.
• Classify risk into two categories :
– Important
– Likelihood

• Matrix may be used for project evaluation

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Example of a project risk matrix

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Risk Evaluation(Cont.)
• 2. NPV and Risk
– For riskier projects, could use higher discount
rates.
– We can increase Discount rate for risky projects
by 5 to10%.

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Risk Evaluation(Cont.)
• 3. Cost-benefit Analysis:
– In this approach we consider each possible outcome
and estimate the probability of their occurrence.
– So instead of single cash flow we will have set of cash
flows and their occurrence.
• Example: one company wants to create a
software for open market
1. They release the product and there will be no such
product in market and they earn Rs.8 lakh
• probability is 10%.

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Risk Evaluation(Cont.)
2. Their competitor launch similar application
before them and they might earn Rs.1lakh
• probability is 30%
3. They launch the product before the competitor
and they earn Rs. 6.5Lakh
• probability is 60%

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Risk Evaluation(Cont.)
Sales Annual Sales Probability Expected value
Income
High 8,00,000 0.1 80,000
Medium 6,50,000 0.6 390,000
Low 100,000 0.3 30,000
Expected Income 5,00,000

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Risk Evaluation(Cont.)
4. Risk Profile Analysis
• Construction of risk profiles using sensitivity analysis
– We can analyze the risk with project by varying the
parameters of project that affects the cost or benefits of the
project.
– First we do the estimation then we vary it and check it’s
sensitivity.
• For example we are varying the original estimation by +
or – 5% and then recalculate the cost and benefits. If
the project cost and benefits changes drastically then
that parameter becomes sensitive to project 40
Risk Evaluation(Cont.)
5. Decision trees:
• Example:
– Some company is providing payroll service to their
customers.
– Their system is old and number of customers are
increasing. There is a probability that market will
expand more.
– They have two option
• Expand the existing system
• Replace the old with new

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• Expanding existing system
– NPV of 75000(80% probability)
• If market expands more
– The loss will be 100000(20% probability)
• If market does expand after replacing the
system
– The profit will be 250000 (20% probability)
– and if reverse happens then the loss will be -
50000(80% probability)

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Decision trees

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• If it is decided to extend the system the sum
of the values of the outcomes is Rs40,000
(75,000 x 0.8 – 100,000 x 0.2)
• while for replacement it would be Rs.10,000
(250,000 x 0.2 – 50,000 x 0.80).
• Extending the system therefore seems to be
the best bet (but it is still a bet!).
• Decision tree consist of evaluating the
expected benefit of taking each path from a
decision point.
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