Project Management


Important concepts:
Stages of product life cycle
Features of Present value method
Stages involved in execution of a project
Concept of project appraisal
Steps involved in pert analysis
Concept of financial analysis
Feasibly report
Average rate of return
Project appraisal report
Techniques of Risk Analysis
Concept of Project Report
Process of Project Selection
Procedure of CPM Analysis
Source of Project Ideas
Classification of Project

Part A Q&A:

1. Explain the various classification of Project?
The projects can be classified into various types:
1) Based on Ownership
a) Public Projects: These are the projects which are done by public projects. E.g. Construction of Roads & Bridges, Adult Education Programmes, etc.
b) Private Projects: These are the projects which are undertaken by private enterprises. Eg. Any business related projects such as a construction of houses by real estate builders, software development, marriage contracts, etc.
c) Public Private Partnerships: These projects which are undertaken by both government and private enterprises together. E.g., Generation of Electricity by Windmill, Garbage Collection, etc.
2) Based on Investment
a) Large Scale Project: These projects involve a huge outlay or investments, say, crores. Eg. Real Estate Projects, Road Construction of manufacturing facilities, Satellite sending projects of ISRO, Unique Identification Number project of India, etc.
b) Medium Scale Project: These projects involve medium level investment and are technology oriented. Example: Computer industry and electronic industry.
c) Small Scale Project: These projects involve only a lesser investments. E.g., agricultural projects, manufacturing projects.
3) Based on Research in Academia
a) Major Projects: In academia, the major projects are those projects which involve more than one year to 3 or 5 years and minimum funding of ` 3 lakhs in case of social sciences and ` 5 lakh in case of sciences.
b) Minor Projects: The minor projects in academia are those projects which will be completed within a year and have a maximum funding of ` 1 lakh in social science and ` 3 lakh in case of sciences.

4) Based on Sector
a) Agricultural Projects: These are the projects which are related to agricultural sector like irrigation projects, well digging projects, maturing projects, soil upgrading project, etc.
b) Industrial Projects: These are the projects which are related to the industrial manufacturing sectors like cement industry, steel industry, textile industry, etc. For example, technology transfer project, marketing project, capital issue project like IPO, etc.
c) Service Projects: These are the projects which are related to the services sectors like education, tourism, health, public utilities, etc. For example, adult literacy project, medical camp, general health check up camp, etc.
5) Based on Objective
a) Commercial Projects: These projects are undertaken for commercial purpose and return on investment is expected out these projects. For example, Toll roads based on BOLT – Build Own Lease Transfer Model or BOOT – Build Own Operate and Transfer Model, Product Launching project.
b) Social Projects: These projects are undertaken for social purposes and welfare of the people is the aim of these projects. These projects are undertaken either by the Government or Service oriented Non- Governmental Organizations. For example, Polio immunization Project, Child Welfare Projects, Adult Literacy Projects, etc.
6) Based on Nature
a) Conventional Projects: These projects are traditional projects which do not apply any innovative ideas or technology or method. For ex­ample, conventional irrigational projects, handicraft projects, etc.
b) Innovative Projects: These projects involve the use of technology, high R&D, development of new products and services. These innovative projects can be further classified into
i) Technology: Depending on the level of technological uncertainty at the time of initiation of projects, the projects can be classified into: Low-Tech projects which relay on the existing and well established base technologies; Medium-Tech projects which rest mainly on existing base technologies but incorporate some new technology or feature; High-Tech projects in which most of the technologies employed are new, but existent, having been developed prior to the project’s initiation; and Super High- Tech projects which are based primarily on new, not entirely existent technologies.
ii) Research: Based on the type of research, projects can be classified into: Exploratory research projects which may generate novel idea in the domain of knowledge; constructive research projects which are mainly done by many technological corporate to find new or alternative solutions to any particular crisis or problems, eg., renewable energy research or development of the capacity of optical fiber; and Empirical research projects are very impressive observational type of research in which testing on real life data or analysis of pattern of some specific events in order to identify the nature or the class of trend that specific phenomenon maintains.
iii) New product development: These projects are undertaken in the life cycle of a product. These projects can be classified into advance development projects which aim at inventing new science or capturing new know-how for the organization; breakthrough development projects which create the first generation of an entirely new product and involve significant change in the product and process technology; platform or next generation development projects which provide a basis for a product and process family and thus establish the basic architecture for follow-on derivative projects; and derivative development projects which refine and improve selected performance dimensions.
7) Based on Time
a) Long term projects: These projects take a very long duration to complete. These projects are run for many years till the objective is reached. For example, Eradication of diseases like Polio, Filaria, etc.
b) Medium term projects: These projects take a medium term duration like 3 to 5 years. For example, Modernization projects, computerization of operations, etc.
c) Short term projects: These projects are executed within a short period, normally within a year. For example, Pond cleaning project, health camps, software development, etc.
d) Very short term projects: By very name you can understand that these projects are completed within a very short period, say, within a day. For example, product launch project.
8) Based on Functions
Based on the functional area of management, the projects can be classified into:
a) Marketing Projects which are taken up in the area of marketing a product or service of an organization. Marketing road shows, implementing a marketing strategy, etc.
b) Financial Projects are undertaken to raise finance or restructure capital structure. For example, IPO Project, share split project, etc.
c) Human Resources Projects are undertaken in the area of human resources of an organization, e.g., Induction training project, campus recruitment project, etc.
d) IT and Technology Projects which are undertaken in the area of IT companies or IT related requirement of any organization, e.g., development of Human Resources Information System, Marketing Information System, etc.
e) Production Projects are undertaken in the area of production or operations. For example, overhauling projects, preventive maintenance projects, getting an ISO certification, etc.
f) Strategic Projects are taken by the organizations to executive a strategy, for example, mergers and acquisition projects, Core Banking Solution project introduced in banks, etc.
9) Based on Risk
a) High Risk Projects: These projects involve a very high degree of risk, for example, nuclear energy project, thermal energy project, satellite projects, etc. If the project is not handled properly, the effect will be very adverse. Thus, high precautionary measures are to be taken to commission these projects.
b) Low Risk Projects: These projects do not involve risk and they are carried out in the normal course of action. For example, road and bridge construction, house construction.
10) Based on Investment Decisions
On the basis how the projects influence the investment decision products, project can be classified into
a) Independent Projects: An independent project is one, where the acceptance or rejection does not directly eliminate other projects from consideration or affect the likelihood of their selection. For example, if management plans to introduce a new product line, as well as, replace a machine which is currently producing a different product. These two projects can be considered independent of each other, if there are sufficient resources to adopt both, provided, they meet the firm’s investment criteria.
b) Mutually exclusive Projects: The mutually exclusive projects are projects that cannot be followed at the same time. The acceptance of one prevents the substitute proposal from accepting. Most of them have ‘either or’ decisions. You will not be able to follow more than one project at the same time. The evaluation is done on a sep­arate basis so that one that brings the highest value to the company is chosen.
c) Contingent Projects: A contingent project is one where the ac­ceptance or rejection depends on the decision to accept or reject multiple numbers of other projects. Such projects may be comple­mentary or substitutes. Let us take the example of bio fuel plant cultivation in a large scale and the decision to set up a bio fuel manufacturing unit. In this case, the projects are complementary to each other. The cash flows of the plant cultivation will be enhanced by the existence of a nearby manufacturing plant. Conversely, the cash flows of the manufacturing unit will be enhanced by the exist­ence of a nearby cultivation farm.
11) Based on Output
Based on output, projects are classified into quantifiable and non-quantifiable ones.
a) Quantifiable projects: In these projects, the benefits / goals of which are amenable for measurement. Quantitative expression of the outcomes is possible. It is easy to understand and appreciate quantitative projects as it is easy to communicate them. For instance, enterprises engaged in the production of various goods and services come under this category.
b) Non-quantifiable projects: In these projects quantification of the benefits / outcome may not always be possible as the impact of the project is spread over a longer period. The benefits accrue to the intended beneficiaries in the long run. Projects concerning health, education, and environment fall under this category.
12) Based on Techno-Economic Characteristics
Based on the technology intensity, size of the investment, and scope of the project, projects are also classified as techno-economic projects. For instance, the United Nations Organization (UNO) and its various developmental agencies use the Standard Industrial Classification of all economic activities in collection and compilation of economic data regarding projects. On the basis of Techno-economic factors, projects can be further classified into a) Factor Intensity Oriented; b) Causation Oriented and c) Magnitude Oriented.
a) Factor Intensity Projects: It is anybody’s knowledge that some projects are capital intensive while some are labour intensive. However, as technological advancements are taking place in every sector in a big way, many projects are becoming more technology intensive and less labour intensive. The gestation period of some of the projects also is quite long. Large scale investments are made
in the plant and machinery. Economies of scale and the associated cost competitiveness also prompt the establishment of large scale organizations.
b) Causation-Oriented Projects: The availability of a particular raw material in abundance in a particular region could be the reason for conceiving projects at times. To make use of the locally avail­able raw material, skilled workforce and to promote development of a backward region, some projects are conceived and formulated. Similarly, in a few cases, where the supply of a particular good falls short of demand necessitating imports from abroad, entrepreneur­ial projects are conceived. Thus, in some case, the existing demand for goods and services cause the establishment of business organi­zations. The demand pull plays a dominant role in such projects.
c) Magnitude Oriented Projects: Based on the size of the project, projects may be classified under large, medium and small scale projects. The size of the investment, gestation period, employment generation, etc. is some of the factors that influence the size of the project.
13) Based on Financial Institutions’ Classification
Financial institutions – both central and state level have classified projects into profit-oriented projects and service-oriented projects.
a) Profit-Oriented Projects: They are classified into a) New Projects; b) Expansion Projects or Development projects; c) Modernization Projects or Technology Projects and d) Diversification Projects.
b) Service-Oriented Projects: They are classified into a) Welfare Projects; b) Service Projects; c) Research and Development Projects and d) Educational Projects.

2. Write a short note on
1. Cost benefit Ratio:
The benefit-to-cost ratio (BCR) is a financial ratio that's used to determine whether the amount of money made through a project will be greater than the costs incurred in executing the project. If the costs outweigh the benefits, then the project does not deliver value for money under the assumed conditions. The benefit-to-cost ratio has two elements: the benefits of a project or proposal, and the costs of the project or proposal. Qualitative factors, such as the benefit a project might have to society, should be expressed in monetary terms where possible to ensure an accurate result.
Benefit Cost Ratio
Benefit Cost Ratio (B/C ratio) or Cost Benefit Ratio is another criteria for project investment and is defined as present value of net positive cash flow divided by net negative cash flow at i*.
Benefit Cost Ratio=PV of Net Positive Cash Flow/PV of Net Negative Cash Flow
Or
Excess Present Value Index (Or Benefits Cost (B/C) Ratio)
= PV of future cash inflows x 100
PV of future cash outflows
Excess Present Value Index provides ready comparison between investment proposals of different magnitudes.
Example: A company has ` 30, 00,000 allocated for capital budgeting purposes. The following proposals and associated profitability indices have been determined:
Project
Amount
Profitability Index
1
9,00,000
1.22
2
4,50,000
0.95
3
10,50,000
1.2
Project
Amount
Profitability Index
4
1350000
1.18
5
600000
1.2
6
1200000
1.05
Which of the above investments should be undertaken? Assume that projects are indivisible and there is no alternative use of money allocated for capital budgeting.
Solution
Statement of Ranking of Projects on the Basis of Profitability Index

Project
Amount
Profitability Index
Rank

1
900000
1.22
1

2
450000
0.95
5

3
1050000
1.2
2

4
1350000
1.18
3

5
600000
1.2
2

6
1200000
1.05
4

Project
Amount
(in `)
Profitability Index
Cash inflows of project (`)
NPV of Project
(in `)
A
B
C
D = A * B
E= D - B
5
6,00,000
1.2
7,20,000
1,20,000
6
12,00,000
1.05
12,60,000
60,000
The above table shows that the allocation of funds to the projects 1, 3 and 5 (as selected according to P.I.) will give NPV of ` 5,28,000 (198000 + 210000 + 120000) and ` 4,50,000 [3000000 - (900000 + 1050000 + 600000) will remain unspent. However, the NPV of the project 3, 4 and 5 is ` 573000which is more than the NPV of projects 1, 3 and 5. Moreover, by undertaking projects 3, 4 and 5 no money will remain unspent. Hence, the company is advised to undertake investment in projects 3, 4 and 5.

2. Internal Rate of Return:
The internal rate of return (IRR) is a discounting cash flow technique which gives a rate of return earned by a project. The internal rate of return is the discounting rate where the total of initial cash outlay and discounted cash inflows are equal to zero. In other words, it is the discounting rate at which the net present value(NPV) is equal to zero.
IRR
3. Average rate of Return:
The term “average rate of return” refers to the percentage rate of return that is expected on an investment or asset vis-à-vis the initial investment cost or average investment over the life of the project. The formula for average rate of return is derived by dividing the average annual net earnings after taxes or return on the investment by the original investment or the average investment during the life of the project and then expressed in terms of percentage.
accounting-rate-of-return-method-img1

The Fine Clothing Factory wants to replace an old machine with a new one. The old machine can be sold to a small factory for $10,000. The new machine would increase annual revenue by $150,000 and annual operating expenses by $60,000. The new machine would cost $360,000. The estimated useful life of the machine is 12 years with zero salvage value.
Required:
1.     Compute accounting rate of return (ARR) of the machine using above information.
2.     Should Fine Clothing Factory purchase the machine if management wants an accounting rate of return of 15% on all capital investments?

Solution:

(1): Computation of accounting rate of return:
= $60,000* / $350,000**
= 17.14%
*Incremental net operating income:
Incremental revenues – Incremental expenses including depreciation
$150,000 – ($60,000 cash operating expenses + $30,000 depreciation)
$150,000 – $90,000
$60,000
** The amount of initial investment has been reduced by net realizable value of the old machine ($360,000 – $10,000).
(2). Conclusion:
According to accounting rate of return method, the Fine Clothing Factory should purchases the machine because its estimated accounting rate of return is 17.14% which is greater than the management’s desired rate of return of 15%.

3. Describe project portfolio management?
Project Portfolio Management System (PPM) is a term used by project managers and project management (PM) organizations, (or PMO’s), to describe methods for analysing and collectively managing a group of current or proposed projects based on numerous key characteristics. The fundamental objective of PPM is to determine the optimal mix and sequencing of proposed projects to best achieve the organization’s overall goals - typically expressed in terms of hard economic measures, business strategy goals, or technical strategy goals - while honouring constraints imposed by management or external real-world factors. Typical attributes of projects being analysed in a PPM process include each project’s total expected cost, consumption of scarce resources (human or otherwise) expected timeline and schedule of investment, expected nature, magnitude and timing of benefits to be realized, and relationship or inter-dependencies with other projects in the portfolio.
Thus, Project Portfolio Management is about more than running multiple projects. Each portfolio of projects needs to be assessed by its business value and adherence to strategy. The portfolio should be designed to achieve a defined business objective or benefit. Project management guru Bob Buttrick summarized it when he said; “Directing the individual project correctly will ensure it is done right. Directing ‘all the projects’ successfully will ensure we are doing the right projects.” Project portfolio management organizes a series of projects into a single portfolio of reports that capture project objectives and other critical factors. While at individual project level it is important to know how each project is performing, the impact of each project on the portfolio is also important.

4. How do you differentiate between leading and managing the project?
5. Differentiate between CPM and PERT?
BASIS FOR COMPARISON
PERT
CPM
Meaning
PERT is a project management technique, used to manage uncertain activities of a project.
CPM is a statistical technique of project management that manages well defined activities of a project.
What is it?
A technique of planning and control of time.
A method to control cost and time.
Orientation
Event-oriented
Activity-oriented
Evolution
Evolved as Research & Development project
Evolved as Construction project
Model
Probabilistic Model
Deterministic Model
Focuses on
Time
Time-cost trade-off
Estimates
Three time estimates
One time estimate
Appropriate for
High precision time estimate
Reasonable time estimate
Management of
Unpredictable Activities
Predictable activities
Nature of jobs
Non-repetitive nature
Repetitive nature
Critical and Non-critical activities
No differentiation
Differentiated
Suitable for
Research and Development Project
Non-research projects like civil construction, ship building etc.
Crashing concept
Not Applicable
Applicable

6. Explain the components of Project feasibility study?
A project feasibility study is a report that investigates the viability of a project.  It seeks to provide its stakeholders with an analysis that results in a go/no-go decision.
Feasibility studies are performed in a variety of industries.  They are prominent in the oil & gas, mining, or renewable energy industries, or manufacturing industry for new plant investments.  They are performed wherever a large capital expenditure for a project must be approved by the executive or board.
Feasibility studies are usually carried out by major engineering firms who have the multi-disciplinary expertise on all the major project issues like project design, economics, environmental, logistics, stakeholder, regulatory requirements, and so forth.
A project feasibility study involves performing the detailed project design to a level that can justify a final project decision.  Although it varies by industry, this is usually around 80% – 100% complete.  In terms of project cost, it varies from around 5% – 15%.
The contents of a project feasibility study are:
§  Design Summary
§  Economics
§  Geopolitical
§  Environmental
§  Historical
§  Social

Design Summary

The feasibility study must perform the project design to a minimum level that allows the executives or board to make a final decision to proceed with the project.
The project cost must be estimated to a level that:
§  Is sufficient to obtain project financing
§  Is sufficient to make a final project go/no-go decision
On the impact side, the design must be sufficiently complete to ensure that all of the project’s impacts are well known:
§  Environmental
§  Social
§  Geopolitical
In most industries, many studies are produced prior to the final feasibility study.  In major industrial projects, for example, a scoping study or pre-feasibility study will assess the economics of one or two major factors that are driving the project’s viability.  However, they generally serve only as a guideline used to proceed to the next phase, rather than a definitive investigation of the viability of the project.
Typically, if there is a processing plant the size and throughput of the plant is finalized.  If there is a production item like a solar farm the number and size of units are finalized.  For a mine, the mining and processing rates are finalized.
The manpower and project schedule are analysed, and the transportation and logistics are planned out.  In short, every item that has a possibility of derailing the project is investigated to ensure it does not pose a risk to project success.  Or if it does, the stakeholders are proceeding with full knowledge of that risk.
Although the project design is often completed as part of the feasibility study, the design details are usually not included in their entirety because they are not the main focus of the report.  Rather, the project design is summarized within the feasibility study to give the readers context.  Approval of the final design details comes after the feasibility decision phase.

Economics

The most important part of a feasibility study is the economics.  Economics is the reason most projects are undertaken (with some exceptions for government and non-profit projects in which a cost benefit analysis is the primary tool).
Simply put, none of the other feasibility criteria matter if the project does not generate a return on investment.
The economic feasibility of a project is determined by:
§  Estimating the project costs
Because the design is mostly complete, each item is estimated using comparisons to previous projects (analogous estimating) or unit rate averages from various sources (parametric estimating).  These project costs are agglomerated into an overall project estimate (bottom up estimating) to determine the overall capital cost of the project.
§  Estimating revenue
the revenue generated from the project is usually alot less certain than the capital cost of the plant.  For that reason, feasibility studies usually evaluate several different scenarios, for example high-medium-low or optimistic/pessimistic scenarios.  If there is an underlying commodity price, like the price of crude oil, a discount from the current price is usually applied to account for potential price volatility.  Risk analysis is an important component of this step, since there are usually many risk events that could impact the project’s revenue stream.
§  Estimating operations and maintenance costs
the ongoing yearly costs of the facility once constructed are estimated and enter the analysis together with the capital (one-time) cost.  Usually, but not always, this is known with a fairly strong degree of certainty and contingency factors are not necessary.
§  Capital budgeting techniques
the feasibility study considers all of the capital inflows and outflows accounting for the time value of money.  Metrics such as the Net Present Value (NPV), Internal Rate of Return (IRR), and payback period are calculated to give the decision makers the necessary information to approve or cancel the project.
The first thing the decision makers usually look at are the three main capital budgeting figures:
1.      Net Present Value
The current value, in today’s currency, of the full stream of cash flows (positive and negative) assuming a discount rate that takes into account the time value of money and the organization’s opportunity cost.
2.      Internal Rate of Return
The percentage return generated by the project, which is comparable to a stock market return.
3.      Payback Period
The length of time it takes to recover the initial investment.

Geopolitical

Political considerations are a factor in the feasibility of many projects.  Although it is rare that government regulation causes a project to be rejected outright, it is not uncommon that they cause project changes which increase the project budget or affect the completion date.
In addition, the geopolitical landscape can change very quickly, and should be assumed to change for projects that require more than a year of planning.
Project managers need to continually ask themselves what is the appetite for the project among the political class.  Sensitive sectors include:
§  Oil and gas
§  Mining
§  Renewable energy
§  Electric vehicles
In these industries, change is a constant.  But do not assume that change occurs only in one direction.  A new government can, and has, wiped out many projects that are in a trendy niche.
Hence, a feasibility study should investigate the odds of obtaining regulatory approval for the project, and what the future changes to those regulations are anticipated to be.

Environmental

In this day and age, environmental regulations are integral to project feasibility.  There are many environmental regulations that could derail a project if a project manager is not familiar with their project’s environmental footprint.  Major projects must plan for stakeholder engagement since any one stakeholder can revolt and stop the project.
In most jurisdictions, environmental reviews must be completed for any construction work that involves disturbing a site.  These reviews require monitoring and establishing a baseline for a variety of ecosystem components, which include:
§  Soils and erosion
§  Vegetation (grasses, bushes, and trees)
§  Wetlands
§  Wildlife
§  Fish
§  Hydrology and storm water
§  Water quality
§  Air quality
§  Groundwater
§  Noise
§  Navigation
§  Cultural resources

Historical

You might be surprised how many projects are commissioned without a proper idea of who tried the same thing, how long ago, and whether or not they were successful.  Success is often relative – maybe they succeeded partially and there are good lessons learned for the current project manager.
Even if it doesn’t swing the project feasibility, the previous lessons learned could significantly reduce the cost or schedule of the project.
This is one of the most underrated areas of project feasibility because there is almost always someone who has done (or is doing) something nearby, or at an earlier time period, which provides tremendous insight into the project.  
Most mining or oil and gas projects perform an extensive desktop investigation into the mining history at the site, taken from government records and files.  This is an important component of the feasibility study as it gives the executives a context in which to make the decision to approve the project.
Likewise, solar and wind farms must measure and analyse the amount of resource at the site.  Data from nearby existing operations, or monitoring stations that didn’t result in developments, are priceless information for project feasibility.

Social

Many projects have a societal impact that is an integral component of project feasibility.  Even if the societal impacts are moderate and unlikely to be the determining factor in project feasibility, they can factor into project budgets and schedules.
Societal impacts are often difficult to quantify prior to a project decision.  Although it is often not possible to get societal buy-in prior to approving the project, it should be addressed to the maximum extent possible to make a project decision.
Stakeholders who are opposed to the project should be identified and classified into five categories:
1.      Unaware
2.      Opposed
3.      Neutral
4.      Supportive
5.      Leading (actively promoting the project)