Slides from Introduction to Project Management LU2

2. LEARNING UNIT OBJECTIVES
 Describe the initiation phase
 Describe reasons for project to take place
 Explain and make use of project estimations
 Explain and make use of project selection techniques: financial and non- financial
 Discuss feasibility in terms of identification and analysis of risk for Project
Selection Purposes
 Discuss how to obtain financial support for projects
 Describe stakeholder management
 Create a project charter and preliminary scope document
 Describe the kick off meeting

3. THE INITIATION PHASE
Describe
Reasons for
Initial
project to
meeting
take place
Project Initiation Project
charter Phase estimations
Project
Financial
selection
support
techniques
Risk analysis
and
identification

4. YES OR NO
Decline
Poor returns
Limited capacity
Six Reasons for a project to take place
 Business needs
 Market demands
 Customer requests
 Legal requirements
 Technological advances
 Social need

5. PROJECT ESTIMATIONS
Conceptual Estimate – Best Guess!!!
Page 58 example
Definitive Estimate – Meat on the bone!!!
More research
Page 58 example

6. PROJECT SELECTION TECHNIQUES - FINANCIAL
Financial selection methods probably most important selection technique.
We will look at three techniques:-
PAYBACK PERIOD
RETURN ON INVESTMENT
NET PRESENT VALUE

7. FINANCIAL SELECTION TECHNIQUES
METHOD OUTCOME UNIT OF
MEASUREMENT
Payback Period Measures time taken to Years and months
breakeven
Return on Investment Measures rate at which Percentage
(ROI) investment grows
Net Present Value (NPV) Measures overall Rand
present day value of
present day and future
cashflows
Internal Rate of Return Growth rate at which Percentage
(IRR) NPV is equal to zero

8. COMPARISON OF PROJECTS
PROJECT A PROJECT B
Initial investment R50000 Year Opening Balance
Return Yr 1 R10000 1 -R70000
Return Yr 2 R10000 2 -R40000
Return Yr 3 R20000 3 R10000
Return Yr 4 R30000 4 R10000
Return Yr 5 R25000 5 R60000
Return Yr 6 R60000 6 R120000
7 R145000

9. COMPARISON OF PROJECTS
PROJECT A PROJECT B
Initial R50000 R70000
investment
Opening Yearly Return Opening Yearly Return
Balance Balance
Year 1 -R50000 R10000 -R70000 R30000
Year 2 -R40000 R10000 -R40000 R50000
Year 3 -R30000 R20000 R10000 R0
Year 4 -R10000 R30000 R10000 R50000
Year 5 R20000 R25000 R60000 R60000
Year 6 R45000 R60000 R120000 R25000
Year 7 R105000 R145000

10. CLASS EXERCISE
PROJECT C PROJECT D
Initial R65000 R85000
investment
Opening Yearly Return Opening Yearly Return
Balance Balance
Year 1 20000 -R85000
Year 2 5000 -R65000
Year 3 10000 -R45000
Year 4 10000 -R20000
Year 5 35000 R15000
Year 6 10000 R45000
Year 7 R60000
FILL IN THE GAPS FOR PROJECT C AND PROJECT D

11. CLASS EXERCISE
PROJECT C PROJECT D
Initial R65000 R85000
investment
Opening Yearly Return Opening Yearly Return
Balance Balance
Year 1 -R65000 R20000 -R85000 R20000
Year 2 -R45000 R5000 -R65000 R20000
Year 3 -R40000 R10000 -R45000 R25000
Year 4 -R30000 R10000 -R20000 R35000
Year 5 -R20000 R35000 R15000 R30000
Year 6 R15000 R10000 R45000 R15000
Year 7 R25000 R60000

12. CALCULATION OF PAYBACK TIME
Just year is not sufficient, need to calculate number of months as well
PAYBACK MONTH = OUTSTANDING BALANCE FOR PAYBACK YEAR X 12
REVENUE FOR PAYBAK YEAR
THIS FORMULA IS IMPORTANT: REMEMBER IT!!!!!

13. COMPARISON OF PROJECTS
PROJECT A PROJECT B
Initial R50000 R70000
investment
Opening Yearly Return Opening Yearly Return
Balance Balance
Year 1 -R50000 R10000 -R70000 R30000
Year 2 -R40000 R10000 -R40000 R50000
Year 3 -R30000 R20000 R10000 R0
Year 4 -R10000 R30000 R10000 R50000
Year 5 R20000 R25000 R60000 R60000
Year 6 R45000 R60000 R120000 R25000
Year 7 R105000 R145000
Payback month A = (10000/30000) x 12 = 4 months
PAYBACK = 3 years 4 months

14. CLASS EXERCISE
PROJECT C PROJECT D
Initial R65000 R85000
investment
Opening Yearly Return Opening Yearly Return
Balance Balance
Year 1 -R65000 R20000 -R85000 R20000
Year 2 -R45000 R5000 -R65000 R20000
Year 3 -R40000 R10000 -R45000 R25000
Year 4 -R30000 R10000 -R20000 R35000
Year 5 -R20000 R35000 R15000 R30000
Year 6 R15000 R10000 R45000 R15000
Year 7 R25000 R60000
CALCULATE PAYBACK (YR & MONTHS) FOR PROJECTS B,C & D

15. PAYBACK EXERCISE
PROJECT PAYBACK
A 3 YRS & 4 MONTHS
B 1 YR & 10 MONTHS
C 4 YRS & 7 MONTHS
D 3 YRS & 7 MONTHS
WHICH PROJECT WOULD YOU SELECT AND WHY?

16. MISTAKES IN PROJECT MANAGEMENT
Show “Titanic” film

17. RETURN ON INVESTMENT
PROJECT A
PROJECT A PROJECT B
Step 1
Total Yearly returns Initial R50000 R70000
investment
Step 2
Opening Yearly Opening Yearly
Total Profit/Loss = yearly Balance Return Balance Return
returns – initial
Year 1 -R50000 R10000 -R70000 R30000
investment
Year 2 -R40000 R10000 -R40000 R50000
Step 3 Year 3 -R30000 R20000 R10000 R0
Calculate average profit Year 4 -R10000 R30000 R10000 R50000
= Total profit/ no years Year 5 R20000 R25000 R60000 R60000
Year 6 R45000 R60000 R120000 R25000
R105000 R155000 R145000

18. RETURN ON INVESTMENT
Measures the rate of growth of an investment
ROI = AVERAGE PROFIT X 100
INITIAL INVESTMENT
ROI “A” = 17500 X 100
50000
= 35%

19. RETURN ON INVESTMENT
Now calculate the Return on Investment for projects B, C & D

20. PROJECT COMPARISON
PAYBACK ROI
A 3 YRS 4 MTHS 35%
B 1 YR 10 MTHS 34.52%
C 4 YRS 7 MTHS 6.4%
D 3 YRS 7 MTHS 11.76%
TYPICALLY WE WOULD SELECT PROJECT WITH HIGHEST ROI

21. NET PRESENT VALUE
Takes time value of money into consideration
INVEST TODAY GENERATE ONE YEAR
R100000 R105000 X
INTEREST RATE IS 9% SO WOULD NEED A MINIMUM OF
R109000 TO BREAKEVEN!!!

22. NET PRESENT VALUE
 MEASURES VALUE OF INVESTMENT IN RAND
 ONLY CONSIDER PROJECTS WITH A NPV GREATER THAN 0
 NEED A DISCOUNT FACTOR – PROJECT MANAGERS HAVE TO IDENTIFY THIS FOR
THEIR PROJECT
 IN EXAM THIS FIGURE WILL BE GIVEN TO YOU

23. NET PRESENT VALUE EXAMPLE
Discount factor Interest rate = 9%
• Convert this to a decimal fraction
by dividing by 100 = 0.09
𝟏 • Year 1 =
𝟏
= 0.917
𝟏
𝟏+𝟎.𝟎𝟗
𝟏+ 𝒊 𝒏
𝟏
• Year 2 = 𝟐 = 0.842
i = the interest rate 𝟏+𝟎.𝟎𝟗
n = number of years 𝟏
• Year 3 = 𝟑 = 0.772
𝟏+𝟎.𝟎𝟗
• And so on for no of years

24. NET PRESENT VALUE
YEAR DISCOUNT REVENUE DISCOUNTED COST DISCOUNTED
FACTOR REVENUE COST
D R DxR
0 1 R50000 R50000
1 0.917 R10000 R9170
2 0.842 R10000 R8420
3 0.772 R20000 R15440
4 0.708 R30000 R21240
5 0.650 R25000 R16250
6 0.596 R60000 R35760
TOTAL R155000 R106280 R50000 R50000
NPV = DISCOUNTED REVENUE – DISCOUNTED COST = R106280-R50000
= R56280

25. NET PRESENT VALUE
CLASS EXERCISE
 PREPARE NPV TABLES FOR PROJECT B,C & D. ASSUME INTERST RATE IS 9% FOR
ALL PROJECTS
 CALCULATE THE NPV FOR ALL 3 PROJECTS AND ADD TO YOUR COMPARISON
TABLE OF PROJECTS

26. NPV PROJECT B
PROJECT B
DISCOUNT DISCOUNTED DISCOUNTED
YEAR FACTOR REVENUE REVENUE COST COST
0 1 70000 70000
1 0.917 30000 27510
2 0.842 50000 42100
3 0.772 0 0
4 0.708 50000 35400
5 0.65 60000 39000
6 0.596 25000 14900
TOTAL 215000 158910 70000 70000
NPV 88910

27. NPV – PROJECT C
PROJECT C
DISCOUNT DISCOUNTED DISCOUNTED
YEAR FACTOR REVENUE REVENUE COST COST
0 1 65000 65000
1 0.917 20000 18340
2 0.842 5000 4210
3 0.772 10000 7720
4 0.708 10000 7080
5 0.65 35000 22750
6 0.596 10000 5960
TOTAL 90000 66060 65000 65000
NPV 1060

28. NPV – PROJECT D
PROJECT D
DISCOUNT DISCOUNTED DISCOUNTED
YEAR FACTOR REVENUE REVENUE COST COST
0 1 85000 85000
1 0.917 20000 18340
2 0.842 20000 16840
3 0.772 25000 19300
4 0.708 35000 24780
5 0.65 30000 19500
6 0.596 15000 8940
TOTAL 145000 107700 85000 85000
NPV 22700

29. PROJECT COMPARISON
PAYBACK ROI NPV
A 3 YRS 4 MTHS 35% R56280
B 1 YR 10 MTHS 34.52% R88910
C 4 YRS 7 MTHS 6.4% R1060
D 3 YRS 7 MTHS 11.76% R22700
TYPICALLY WE WOULD SELECT PROJECT WITH LOWEST PAYBACK TIME,
HIGHEST ROI, HIGHEST NPV

30. INTERNAL RATE OF RETURN
 The rate at which the NPV is equal to zero.
 The project with the highest IIR should be selected
 You are not required to perform IIR calculations for
this course

31. NON – FINANCIAL SELECTION TECHNIQUES
Four non-financial techniques:-
 Production considerations
 Marketing considerations
 Personnel considerations
 Administration and other considerations

32. WEIGHTED SCORING MODELS
 Weight between 0 and 1
 The more important the criteria the higher the
weighting
 The total of the weights must add up to 1
 Compile a scoring matrix for each of listed criteria
 Calculate a score per category and an overall score
 Different catergories can then be compared on an
equal basis

33. WEIGHTED SCORING MODELS
PROJECT A
(14/15)*100 CRITERIA SCORE WEIGHT RELATIVE SCORE 4*0.1
FINANCIAL CONSIDERATIONS
PAYBACK 4 0.1 0.4
93% ROI 5 0.2 1
NPV 5 0.2 1
TOTAL 14
(4/10)*100
PRODUCTION CONSIDERATIONS
NO DISRUPTION 1 0.05 0.05
REQUIRED TECHNOLOGY
40% AVAILABLE 3 0.1 0.3
TOTAL 4
MARKETING CONSIDERATIONS
BENEFICIAL FOR FUTURE
100% WORK 5 0.2 1
TOTAL 5
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
(3.9/5)*100
REQUIRED 1 0.05 0.05
NO EXCESSIVE STRESS TO
20% STAFF 1 0.05 0.05
TOTAL 2
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 1 0.05 0.05
20% 1 3.9
TOTAL 1 78%

34. CLASS EXERCISE – WEIGHTED SCORING
PROJECT B
CRITERIA SCORE WEIGHT RELATIVE SCORE
FINANCIAL CONSIDERATIONS
PAYBACK 2 0.1
ROI 3 0.2
NPV 5 0.2
TOTAL 10
PRODUCTION CONSIDERATIONS
NO DISRUPTION 3 0.05
REQUIRED TECHNOLOGY
AVAILABLE 1 0.1
TOTAL 4
MARKETING CONSIDERATIONS
BENEFICIAL FOR FUTURE
WORK 3 0.2
TOTAL 3
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
REQUIRED 3 0.05
NO EXCESSIVE STRESS TO
STAFF 3 0.05
TOTAL 6
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 3 0.05
1
TOTAL 3

35. WEIGHTED SCORING – PROJECT B
PROJECT B
CRITERIA SCORE WEIGHT RELATIVE SCORE
FINANCIAL CONSIDERATIONS
PAYBACK 2 0.1 0.2
67% ROI 3 0.2 0.6
NPV 5 0.2 1
TOTAL 10
PRODUCTION CONSIDERATIONS
NO DISRUPTION 3 0.05 0.15
REQUIRED TECHNOLOGY
40% AVAILABLE 1 0.1 0.1
TOTAL 4
MARKETING CONSIDERATIONS
BENEFICIAL FOR FUTURE
60% WORK 3 0.2 0.6
TOTAL 3
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
REQUIRED 3 0.05 0.15
NO EXCESSIVE STRESS TO
60% STAFF 3 0.05 0.15
TOTAL 6
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 3 0.05 0.15
60% 1 3.1

36. WEIGHTED SCORING – PROJECT C
PROJECT C
CRITERIA SCORE WEIGHT RELATIVE SCORE
FINANCIAL CONSIDERATIONS
PAYBACK 5 0.1
ROI 3 0.2
NPV 2 0.2
TOTAL 10
PRODUCTION CONSIDERATIONS
NO DISRUPTION 2 0.05
REQUIRED TECHNOLOGY
AVAILABLE 4 0.1
TOTAL 6
MARKETING CONSIDERATIONS
BENEFICIAL FOR FUTURE
WORK 5 0.2
TOTAL 5
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
REQUIRED 1 0.05
NO EXCESSIVE STRESS TO
STAFF 3 0.05
TOTAL 4
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 3 0.05
1

37. WEIGHTED SCORING – PROJECT C
PROJECT C
CRITERIA SCORE WEIGHT RELATIVE SCORE
FINANCIAL CONSIDERATIONS
PAYBACK 5 0.1 0.5
67% ROI 3 0.2 0.6
NPV 2 0.2 0.4
TOTAL 10
PRODUCTION CONSIDERATIONS
NO DISRUPTION 2 0.05 0.1
REQUIRED TECHNOLOGY
60% AVAILABLE 4 0.1 0.4
TOTAL 6
MARKETING CONSIDERATIONS
BENEFICIAL FOR FUTURE
100% WORK 5 0.2 1
TOTAL 5
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
REQUIRED 1 0.05 0.05
NO EXCESSIVE STRESS TO
40% STAFF 3 0.05 0.15
TOTAL 4
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 3 0.05 0.15
60% 1 3.35
TOTAL 3 67%

38. WEIGHTED SCORING – PROJECT D
PROJECT D
CRITERIA SCORE WEIGHT RELATIVE SCORE
FINANCIAL CONSIDERATIONS
PAYBACK 2 0.1
ROI 2 0.2
NPV 2 0.2
TOTAL 6
PRODUCTION CONSIDERATIONS
NO DISRUPTION 5 0.05
REQUIRED TECHNOLOGY
AVAILABLE 4 0.1
TOTAL 9
MARKETING CONSIDERATIONS
BENEFICIAL FOR FUTURE WORK 2 0.2
TOTAL 2
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
REQUIRED 4 0.05
NO EXCESSIVE STRESS TO
STAFF 3 0.05
TOTAL 7
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 3 0.05
1
TOTAL 3

39. WEIGHTED SCORING – PROJECT D
PROJECT D
CRITERIA SCORE WEIGHT RELATIVE SCORE
FINANCIAL CONSIDERATIONS
PAYBACK 2 0.1 0.2
40% ROI 2 0.2 0.4
NPV 2 0.2 0.4
TOTAL 6
PRODUCTION CONSIDERATIONS
NO DISRUPTION 5 0.05 0.25
REQUIRED TECHNOLOGY
90% AVAILABLE 4 0.1 0.4
TOTAL 9
MARKETING CONSIDERATIONS
40% BENEFICIAL FOR FUTURE WORK 2 0.2 0.4
TOTAL 2
PERSONNEL CONSIDERATIONS
EXTENSIVE TRAINING NOT
REQUIRED 4 0.05 0.2
NO EXCESSIVE STRESS TO
70% STAFF 3 0.05 0.15
TOTAL 7
ADMINISTRATION AND OTHER
CONSIDERATONS
ADMIN SYSTEM WILL COPE 3 0.05 0.15
60% 1 2.55
TOTAL 3 51%

40. PROJECT COMPARISON
PAYBACK ROI NPV WEIGHTED
SCORE
A 3 YRS 4 35% R56280 78%
MTHS
B 1 YR 10 34.52% R88910 62%
MTHS
C 4 YRS 7 6.4% R1060 67%
MTHS
D 3 YRS 7 11.76% R22700 51%
MTHS
TYPICALLY WE WOULD SELECT PROJECT WITH LOWEST PAYBACK TIME,
HIGHEST ROI, HIGHEST NPV, HIGHEST WEIGHTED SCORE

41. FEASIBILITY
• Identification and analysis of risk
• Completed estimates may look promising but it is possible that
the project selection team may require a FEASIBILITY STUDY
• Must eliminate bias from feasibility study so research team
should be separate to project team
• Project team may have pre-conceived ideas that would influence
the research
• Feasibility study should give a lot more accurate estimates than
conceptual estimate

42. INTRODUCTION TO RISK MANAGEMENT
• Will be looking at risk management in detail in LU3
• Risks are negative events that can happen in the future
• Cannot predict future with 100% accuracy
• Can assume that past events will often repeat themselves
(remember Titanic video!!)
• If events occurred often in the past it is reasonable to assume
they will happen again in the future
• If event very negative (Olympia vs Titanic) Project Manager
should carefully consider appropriate actions

43. STAKEHOLDER ANALYSIS AND MANAGEMENT
WHAT IS A STAKEHOLDER?
“….people or organisations with vested interests
in your project, who can either gain or lose as
a result of your operations” (Heldman, 2005)

44. EXAMPLES OF STAKEHOLDERS
Project sponsor
Client
Government
Employees

45. STAKEHOLDERS
ORGANISATION
GOVERNMENT COMPETITION
PROJECT
CLIENT EMPLOYEES
ENVIRONMENTAL
SOCIETY
GROUPS

46. STAKEHOLDER MANAGEMENT
Stakeholders (of all types) must be managed!
Group Activity
Read case study on pages 73/74 of manual

47. STAKEHOLDER CONFLICT
• Stakeholders usually have different expectations
• Managing these expectations is stressful
• “You can please some of the people all of the time, all
of the people some of the time, but not all of the
people all of the time”

48. CONSTRAINTS
• Internal constraints – limitations from within the
company and project e.g. behaviour of project team.
Project Manager should have control over these
constraints.
• External constraints – limitations from outside e.g.
actions of environmental groups, supplier delivery
schedules. Project Managers have little control over
these constraints

49. COST-BENEFIT ANALYSIS
A weighting scale approach to decision-making
where the disadvantages are listed on one side
of the balance and disadvantages on the other
See example p75

50. PROBLEMS WITH COST BENEFIT ANALYSIS
• Cannot quantify intangible benefits
• Costs can be calculated with a degree of
accuracy
• Scales may therefore be unfairly tipped to
costs

51. OBTAINING FINANCE
• CORPORATE FINANCE – suitable for projects with
financing needs less than R250 million
• Relatively quick to obtain and is suitable for
organisations that have a good financial position
• PROJECT FINANCE –involves investments by a series
of partners e.g. Government, investment houses.
• Can be lengthy to obtain much larger amounts can be
borrowed than with corporate finance

52. PROJECT CHARTER
• Official initiating document
• Formally recognises projects existence
• Authorises Project Manager to proceed with project
• Makes resources available to project
• Co-ordinates stakeholders inputs
• Provides detailed overview of project requirements
SEE TEMPLATE ON P77

53. INITIAL MEETING
• Usually between Project Manager, the client and
sometimes the sponsor