The World of Project Management; What is project Management

The World of Project Management

1. Project Management Chapter 1 Muhammad Yasir Saeed Qazi

2. What is Project? A unique set of coordinated activities , with a definite start and finishing point , undertaken by an individual or organization to meet specific objectives with defined, scheduled cost and performance parameter s. Temporary endeavors undertaken to create unique products, services or results . (Project Management Institute, 2008)

3. Attributes Unique Purpose Temporary Require Resources, Often From Various Areas Should Have a Primary Sponsor and/or Customer Involve Uncertainty

4. Project Vs. Operations Operations are repetitive , on going and produces same results .

5. Project Vs. Program And Portfolio A  project  is a temporary endeavor undertaken by a company or organization (such as the creation of a new product, service, or result) A  program  is a group of projects that are similar or related to one another, and which are often managed and coordinated as a group instead of independently A  portfolio  is a group of different programs and/or projects within the same organization, which may be related or unrelated to one another Put another way,  projects  fit within larger  programs , which themselves fit within  portfolios . 

6. Examples Of A Project, Program, And Portfolio In The Construction Industry: Project: Constructing a new office building constructing a new office building involves a project manager, a team of construction workers, and a specific budget and timeline to complete the building. Program: Developing a new mixed-use complex a construction program could be developing a new mixed-use complex that includes multiple projects such as design, construction, financing, and leasing.

7. Cont'd Portfolio: Managing a real estate development portfolio For example, managing a real estate development portfolio could involve multiple construction projects and programs, such as investing in commercial and residential properties, managing land development, and overseeing the construction of multiple buildings.

8. Management The planning , organizing , leading and controlling of human and non human resources to achieve the organization goals efficiently and effectively.

9. Project Management Project Management The PMBOK Guide defines project management as the application of knowledge, skills, tools and techniques to project activities to meet project requirements . In other words, it involves planning, organizing, monitoring and controlling the project activities in order to accomplish the project requirements.

10. Program Management Program Management Program Management is a method to manage related groups of projects. (PMI) PMI defines it as “ A group of related projects managed in a coordinated way to obtain benefits and control not available from managing them individually . Programs may include elements of related work outside scope of the discrete projects in the program.” – PMBOK pg 368.

11. Project Management Institution (PMI) Project management institution is an organization which provides different standards that describe good practices, globally recognized credentials that certify project management expertise, and resources for professional development, networking and community . PMI is one of the world’s largest not-for-profit membership associations for the project management profession.

12. PMBOK The Project Management Body of Knowledge (PMBOK) is a collection of processes and knowledge areas generally accepted as best practice within the project management discipline.

13. The Triple Constraints Projects are traditionally described as having three constraints. Quality: the standard of the outcomes to be achieved Cost: the amount of money it will take to complete the project Time: the amount of time available for the project

14. Type of Project Product of Project (Examples) 1.Administrative Installing a new accounting system 2.Construction A building or road 3.Computer Software Development A new computer program 4.Design of Plans Architectural or engineering plans 5.Equipment or System Installation A telephone system or IT system 6.Event or Relocation Olympiads or a move into a new building 7.Maintenance of Process Industries Petro-chemical plant or electric generating station 8.New Product Development A new drug or aerospace/defense product 9.Research A feasibility study or investigating a chemical

15. Different Components of Project Management Project Integration Management Processes required to ensure that various elements of the project are properly coordinated. Example: Let's say you're planning a surprise birthday party for your friend. You would need to coordinate various aspects of the party, such as the guest list , the location , the decorations , the food and drinks , and the entertainment . You would create a plan that outlines all these elements and how they will come together to create the perfect party. As you move forward with the planning , you would monitor progress , take corrective action as necessary, and communicate with other party planners to ensure everything runs smoothly.

16. Different Components of Project Management Project Integration Management Processes required to ensure that various elements of the project are properly coordinated. Project Scope and Time Management Processes required to ensure that the project includes all the work required to complete it successfully in stipulated time. Project Cost and Quality Management Processes required to ensure quality and that the project is completed within the approved budget.

17. Project Human Resource and Communication Management Processes required to make the most effective use of the people involved in the implementation of the project. Project Risk Management Processes required to focus on the future where uncertainty exists and develop suitable plans of action to prevent potential issues from adversely impacting the project. Project Procurement Management Includes the processes to purchase or acquire the products or services needed from outside the project team to perform the work.

18. Why Project Management? Companies have experienced: Better customer relations Shorter overall delivery times Lower costs and higher profit margins Higher quality and reliability Higher worker morale

19. Why (NOT) Project Management? Companies have also experienced some negatives: Greater organizational complexity Increased likelihood of organizational policy violations Higher costs More management difficulties Low personnel utilization

20. Selecting Projects Project selection is the process of evaluating individual projects or groups of projects and then choosing to implement a set of them so that the objectives of the parent organization are achieved.

21. Project Selection Conditions These conditions vary widely from firm to firm, but several are quite common: Is the project potentially profitable ? Does the firm have, or can it easily acquire, the knowledge and skills to carry out the project successfully? Does the organization possess building competencies Does the organization currently have the capacity to carry out the project on its proposed schedule? In the case of R&D projects, if the project is technically successful, does it meet all requirements to make it economically successful?

22. Methods of Selecting Projects Two Fundamental Methods of Selecting Projects Nonnumeric Selection Method Numeric Selection Method

23. Nonnumeric Selection Method The Sacred Cow – The project is suggested by a senior or powerful official in the organisation The Operating Necessity – A project that is required in order to protect lives or property or to keep the company in operation Competitive Necessity – A project that is required in order to maintain the company’s position in the marketplace

24. Numeric Selection Models

25. Learning Objectives Understand the payback period (PBP) method of project evaluation and selection, including its: (a) calculation; (b) acceptance criterion; (c) advantages and disadvantages; and (d) focus on liquidity rather than profitability. Understand the three major discounted cash flow (DCF) methods of project evaluation and selection – internal rate of return (IRR), net present value (NPV), and profitability index (PI). 29

26. Capital budgeting The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. 30

27. Project Evaluation and Selection: Alternative Methods 1. Payback period (PBP) 2. Internal rate of return (IRR) 3. Net present value (NPV) 4. Profitability index (PI) 31

28. Proposed Project Data Julie Miller is evaluating a new project for her firm, Basket Wonders (BW) . She has determined that the after-tax cash flows for the project will be $10,000; $12,000; $15,000; $10,000; and $7,000, respectively, for each of the Years 1 through 5 . The initial cash outlay will be $40,000 . 32

29. Independent Project For this project, assume that it is independent of any other potential projects that Basket Wonders may undertake. Independent -- A project whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration. 33

30. Payback Period The payback period (PBP) of an investment project tells us the number of years required to recover our initial cash investment based on the project’s expected cash flows. 34

31. Payback Period PBP is the period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow. 0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 K

32. Steps in calculating NPV 1. Accumulate the cash flows occurring after the initial outlay in a “cumulative inflows "column. 2. Look at the “cumulative inflows” column and note the last year (a whole figure) for which the cumulative total does not exceed the initial outlay . (In our example, that would be year 3.) 3. Compute the fraction of the following year’s cash inflow needed to “payback” the initial cash outlay as follows: Take the initial outlay minus the cumulative total from step 2 , then divide this amount by the following year’s cash inflow . [For our example, we have ($100,000 − $73,962)/$39,359 = 0.66.] 4. To get the payback period in years, take the whole figure determined in step 2, and add to it the fraction

33. (c) 10 K 22 K 37 K 47 K 54 K Payback Solution (#1) PBP = a + ( b - c ) / d = 3 + ( 40 - 37 ) / 10 = 3 + ( 3 ) / 10 = 3.3 Years 0 1 2 3 4 5 -40 K 10 K 12 K 15 K 10 K 7 K Cumulative Inflows (a) ( -b ) (d)

34. Payback Solution (#2) PBP = 3 + ( 3K ) / 10K = 3.3 Years Note: Take absolute value of last negative cumulative cash flow value. Cumulative Cash Flows -40 K 10 K 12 K 15 K 10 K 7 K 0 1 2 3 4 5 -40 K -30 K -18 K -3 K 7 K 14 K

35. PBP Acceptance Criterion Yes! The firm will receive back the initial cash outlay in less than 3.5 years. [ 3.3 Years < 3.5 Year Max . ] The management of Basket Wonders has set a maximum PBP of 3.5 years for projects of this type. Should this project be accepted?

36. PBP Strengths and Weaknesses Strengths : Easy to use and understand Can be used as a measure of liquidity Easier to forecast ST than LT flows Weaknesses : Does not account for TVM Does not consider cash flows beyond the PBP Cutoff period is subjective

37. Internal Rate of Return (IRR) IRR is the discount rate that equates the present value of the future net cash flows from an investment project with the project’s initial cash outflow. CF 1 CF 2 CF n (1+ IRR ) 1 (1+ IRR ) 2 (1+ IRR ) n + . . . + + ICO =

38. $15,000 $10,000 $7,000 IRR Solution $10,000 $12,000 (1+ IRR ) 1 (1+ IRR ) 2 Find the interest rate ( IRR ) that causes the discounted cash flows to equal $40,000 . + + + + $40,000 = (1+ IRR ) 3 (1+ IRR ) 4 (1+ IRR ) 5

39. IRR Solution (Try 10%) $40,000 = $10,000(PVIF 10% , 1 ) + $12,000(PVIF 10% , 2 ) + $15,000(PVIF 10% , 3 ) + $10,000(PVIF 10% , 4 ) + $ 7,000(PVIF 10% , 5 ) $40,000 = $10,000(.909) + $12,000(.826) + $15,000(.751) + $10,000(.683) + $ 7,000(.621) $40,000 = $9,090 + $9,912 + $11,265 + $6,830 + $4,347 = $41,444 [ Rate is too low!! ]

40. IRR Solution (Try 15%) $40,000 = $10,000(PVIF 15% , 1 ) + $12,000(PVIF 15% , 2 ) + $15,000(PVIF 15% , 3 ) + $10,000(PVIF 15% , 4 ) + $ 7,000(PVIF 15% , 5 ) $40,000 = $10,000(.870) + $12,000(.756) + $15,000(.658) + $10,000(.572) + $ 7,000(.497) $40,000 = $8,700 + $9,072 + $9,870 + $5,720 + $3,479 = $36,841 [ Rate is too high!! ]

41. .10 $41,444 .05 IRR $40,000 $4,603 .15 $36,841 X $1,444 .05 $4,603 IRR Solution (Interpolate) $1,444 X =

42. .10 $41,444 .05 IRR $40,000 $4,603 .15 $36,841 X $1,444 .05 $4,603 IRR Solution (Interpolate) $1,444 X =

43. .10 $41,444 .05 IRR $40,000 $4,603 .15 $36,841 ($1,444)(0.05) $4,603 IRR Solution (Interpolate) $1,444 X X = X = .0157 IRR = .10 + .0157 = .1157 or 11.57%

44. Interpolated Discount Rate Interpolated Discount Rate Interpolated Discount Rate = i L + = 0.1 + =11.57%  

45. IRR Acceptance Criterion No! The firm will receive 11.57% for each dollar invested in this project at a cost of 13% . [ IRR < Hurdle Rate ] The management of Basket Wonders has determined that the hurdle rate is 13% for projects of this type. Should this project be accepted?

46. Hurdle rate Hurdle rate The minimum required rate of return on an investment in a discounted cash flow analysis; the rate at which a project is acceptable.

47. IRR Strengths and Weaknesses Strengths : Accounts for TVM Considers all cash flows Less subjectivity Weaknesses : Assumes all cash flows reinvested at the IRR Difficulties with project rankings and Multiple IRRs

48. Net Present Value (NPV) NPV is the present value of an investment project’s net cash flows minus the project’s initial cash outflow. CF 1 CF 2 CF n (1+ k ) 1 (1+ k ) 2 (1+ k ) n + . . . + + - ICO NPV =

49. Basket Wonders has determined that the appropriate discount rate (k) for this project is 13% . $10,000 $7,000 NPV Solution $10,000 $12,000 $15,000 (1 .13 ) 1 (1 .13 ) 2 (1 .13 ) 3 + + + - $40,000 (1 .13 ) 4 (1 .13 ) 5 NPV = +

50. NPV Solution NPV = $10,000 (PVIF 13% , 1 ) + $12,000 (PVIF 13% , 2 ) + $15,000 (PVIF 13% , 3 ) + $10,000 (PVIF 13% , 4 ) + $ 7,000 (PVIF 13% , 5 ) - $40,000 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 = - $1,428

51. NPV Acceptance Criterion No! The NPV is negative . This means that the project is reducing shareholder wealth. [ Reject as NPV < ] The management of Basket Wonders has determined that the required rate is 13% for projects of this type. Should this project be accepted?

52. NPV Strengths and Weaknesses Strengths : Cash flows assumed to be reinvested at the hurdle rate. Accounts for TVM. Considers all cash flows. Weaknesses : May not include managerial options embedded in the project. See Chapter 14.

53. Profitability Index (PI) PI is the ratio of the present value of a project’s future net cash flows to the project’s initial cash outflow. CF 1 CF 2 CF n (1+ k ) 1 (1+ k ) 2 (1+ k ) n + . . . + + ICO PI = PI = 1 + [ NPV / ICO ] << OR >> Method #2: Method #1:

54. PI Acceptance Criterion No! The PI is less than 1.00 . This means that the project is not profitable. [ Reject as PI < 1.00 ] PI = $38,572 / $40,000 = .9643 (Method #1, 13-34) Should this project be accepted?

55. PI Strengths and Weaknesses Strengths : Same as NPV Allows comparison of different scale projects Weaknesses : Same as NPV Provides only relative profitability Potential Ranking Problems

56. Evaluation Summary Basket Wonders Independent Project

57. Decision Rules Under Uncertainty

58. Introduction Uncertainty exist when the likelihood of this outcome and that outcome can not be estimated, this is, when there is no rational basis for even rough approximations of probability. We therefore fall back on “Principle of Choice” the selection from which can be, and often is, a highly personal matter. The risk prone will go one way, the risk-averse another, and the risk-neutral somewhere within the wide gap that often exists between the two extreme

59. Criterion MAXIMAX MAXIMIN MINIMAX REGRET LAPLACE Harwicz

60. Maximax (Optimistic) This is the OPTIMISTIC type of criterion In this criterion the decision maker does not want to miss the opportunity to achieve the largest possible profit. Procedure 1) Locate the maximum payoff values corresponding to each act 2) From among the maximums choose the highest value 3) The act corresponding to the highest value will be the decision

61. Example Alternative State of Nature Growing Economy (S1) Stable Economy (S2) Declining Economy (S3) Bonds (A1) 40 45 5 Stocks (A2) 70 30 -13 Mutual Funds (A3) 53 45 -5 1) Maximum payoff values corresponding to A1 = 45 i.e. maximum in 1st Row , Maximum payoff values corresponding to A2 = 70 i.e. maximum in 2nd Row Maximum payoff values corresponding to A3 = 53 i.e. maximum in 3rd Row 2) From among the maximums choose the highest value maximum payoff values out of (45, 70, 53) = 70 3) Decision: Invest in Stocks

62. Maximin (Conservative and Pessimistic) This is the PESSIMISTIC type of criterion. This is a conservative approach. Here the decision maker attempts in maximizing the minimum possible profit Procedure 1) Locate the minimum payoff values corresponding to each act 2) From among the minimum choose the maximum value 3) The act corresponding to the maximum value will be the decision

63. Example Alternative State of Nature Growing Economy (S1) Stable Economy (S2) Declining Economy (S3) Bonds (A1) 40 45 5 Stocks (A2) 70 30 -13 Mutual Funds (A3) 53 45 -5 1) Minimum payoff values corresponding to A1 = 5 i.e. minimum in 1st Row , Minimum payoff values corresponding to A2 = -13 i.e. minimum in 2nd Row Minimum payoff values corresponding to A3 = -5 i.e. minimum in 3rd Row 2) From among the minimum choose the highest value maximum payoff values out of (5, -13, -5) = 70 3) Decision: Invest in Bonds

64. Laplace In this criteria it is assumed that all states of nature will occur with equal probability. Here the decision maker finds the average outcome for each act and picks up the act corresponding to maximum value Procedure 1) Find the average payoff values corresponding to each act 2) From among the averages choose the maximum value 3) The act corresponding to the maximum value will be the decision

65. Example Average payoff values corresponding to act A1 = = 90/3 = 30 i.e. average in 1 st row. Average payoff values corresponding to act A2 = = 62/3 = 20.66 i.e. average in 2nd row. Average payoff values corresponding to act 𝐴3 = = 93/3 = 31 i.e. average in 3 rd row From among the averages choose the maximum value i.e. 31 Decision: Invest in Mutual Funds  

66. Minimax Regret In this criteria the decision maker identifies the maximum regret for each act and selects the act for which maximum regret is minimum. Procedure 1) Convert conditional profit matrix into regret matrix i.e. opportunity loss table 2) Find the maximum values corresponding to each act 2) From among the averages choose the minimum value 3) The act corresponding to the minimum value will be the decision

67. Acts State of Nature Growing Stable Declining Bonds 40 45 5 Stocks 70 30 -13 Mutual Funds 53 45 -5 Conditional Payoff Matrix Acts State of Nature Growing Stable Declining Bonds 70-40 45-45 5-5 Stocks 70-70 45-30 5-(-13) Mutual Funds 70-53 45-45 5-(-5) Opportunity Loss Table Acts State of Nature Growing Stable Declining Bonds 30 Stocks 15 18 Mutual Funds 17 10 Opportunity Loss Table

68. Example Step 2) Maximum of A1=Max{30, 0, 0}=30 Maximum of A2=Max{0,15,18}=18 Maximum of A3=Max{17, 0, 10}= 17 Step 3) From among the averages choose the minimum value i.e. min{30,18,17}=17 Step 4) Decision: Invest in Mutual Funds

69. Harwicz Rule The Hurwicz Rule, also known as the Optimism-Pessimism Rule, is used in decision-making under uncertainty. It incorporates the decision maker’s attitude towards risk by weighing the best and worst possible outcomes for each decision. The decision maker assigns a coefficient of optimism (Probability) to reflect their level of optimism about future outcomes.

70. Procedure Identify the Best and Worst Payoffs for Each Act:Determine the highest (best) and lowest (worst) payoffs for each possible decision. Calculate the Hurwicz Criterion for Each Act:For each decision, use the formula:𝐻=𝛼×(Best Payoff)+(1−𝛼)×(Worst Payoff)H=α×(Best Payoff)+(1−α)×(Worst Payoff) Choose the Maximum Value: Compare the calculated values for all decisions and choose the one with the highest value.

71. Harwicz Rule Actions Maximum ( α ) Minimum ( α ) Weighted Average Bonds (A1) 45(0.5) 5(0.5) 25 Stocks (A2) 70(0.5) -13(0.5) 28.5 Mutual Funds (A3) 53(0.5) -5(0.5) 24