Project Initiation:

Feasibility and
Project Authorization
Initiating a project
Goals of this Unit
• Learning qualitative and quantitative techniques to
select among different projects
• Learning qualitative and quantitative techniques to
choose the best alternative among different
implementations of the same project
• Understanding how to write a Feasibility Study
• Choosing between internal development or external
development (make or buy)

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How does a project start?
• Initiation by some stakeholder (a company, a potential
customer, ...) driven by a need (market, social, legal,
technological advance, ...)
• Boundaries and process not always clear or very
formalized
• First activities performed to:
– Agree on the goals (scope)
– Understand value and risks (for the performing organization
and for the other stakeholders)
– Choose a project approach

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Project Value and
Risks
Project Value and Risks
• Three main factors determine the value generated by a
project:
– Direct and indirect value generated by the project
– Sustainability of the project outputs
– Alignment with strategic objectives of an organization
• Various factors determine the risk profile of a project. Among
them are
– Resource availability
– Timing
– Technical difficulties and uncertainties

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Value: Direct and Indirect Value
• The value of a project does not refer necessarily
and only to the revenues it generates directly and
through its outputs.
• Considerations relative to the social and
environmental impact, image and publicity, entering
a new market, and know-how acquired are some of
the considerations that could add or subtract value
from a project.

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Value: Sustainability
• Sustainability refers to the capacity of sustaining the
project and its outputs after the project end
• Taking into account the operational costs of a project’s
outputs and the way in which the project outputs will
survive after a project end is an important consideration
to understand whether a project is worth starting.

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Value: Alignment with the Strategic Objectives

• Ensuring that the project aligns with the goals of an

organization is an essential point to consider before a
project is worth starting.

• Alignment with the strategic objectives can determine

the priority of a project

As pointed out in Maylor (2010), Toyota is a leader in

defining priorities: projects are started only if they directly
contribute to one of the strategic objectives of the
company, namely, quality, cost, or delivery performance.

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Risks: Resource Availability
• Projects require the availability of human, financial,
and technical resources in specific time-frames
• Although it might be difficult to preempt the resources
in advance, a check on the projects needs is a good
sanity-check
• Some aspects to consider include: the required
resource, current load and availability, projections on
future load and availability, priority and importance of
the project

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Risks: Timing
• Many projects have specific time-windows for the
delivery of their outputs
• Deliver too early or too late and the outputs of the
project might be useless
• Consider, for instance, the race of competing firms in
delivering similar products

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Risks: Technical Difficulty and Uncertainty
• The success of many projects relies on the actual
capability of solving various technical challenges.

• Pointing out what these challenges are,

understanding the level of risk associated with such
challenges, and possible corrective or alternative
courses of action are important in determining the
values and risks of a project.

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Techniques to Assess
Value and Risks
Payback Period
The payback period is the time taken to gain a financial
return equal to the original investments

– Measured in months or years

– When using the payback period the projects/options that
minimize the payback period are chosen in favor of the others

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Example
Project A Project B Project C

Year 0 € (50,000.00) € (20,000.00) € (15,000.00)

Year 1 € 30,000.00 € (10,000.00) € 15,000.00

Year 2 € 30,000.00 € 10,000.00 € 1,000.00

Year 3 € 1,000.00 € 60,000.00

Year 4 € 1,000.00 € 50,000.00

Expenses € (50,000.00) € (30,000.00) € (15,000.00)

Gains € 62,000.00 € 120,000.00 € 16,000.00

Profit € 12,000.00 € 90,000.00 € 1,000.00

Payback 2 years 3 years 1 year

Remark: accounting style notation.

Negative numbers in red and in parentheses
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Discussion
• Advantages
– Simple, readily available data
– It reduces exposure to risk
– Particularly effective in high-technology/fashion projects
– It favors shorter term benefits
• Disadvantages
– Difficult to use on longer term projects
– Based only on cash flows
– Does not quantify exposure to risk
– Does not look at total gains

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Payback Weaknesses
• Different projects might have the same the same
payback period, but different profiles in returning of the
investments
• These profiles are not taken into account by the
technique but could make the different between two
projects

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Payback Weaknesses
Same payback period, but
Project A gets more money first
(and reduces risks)

Year Project A Project B

Year 0 € (10,000.00) € (10,000.00)
Year 1 € (5,000.00) € (5,000.00)
Year 2 € 10,000.00 € 5,000.00
Year 3 € 5,000.00 € 10,000.00

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Payback Weaknesses

Different payback periods,

Project B earlier but gets
less money
Year Project A Project B
Year 0 € (10,000.00) € (10,000.00)
Year 1 € (5,000.00) € (5,000.00)
Year 2 € 5,000.00 € 5,000.00
Year 3 € 5,000.00 € 11,000.00
Year 4 € 20,000.00

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Return on Investment (ROI)
ROI calculates the average annual profit and transforms
it into a percentage of the total investments

Profit = Returns - Investments

Annual Profit = Profit / Duration
ROI = Annual Profit / Investments

• When using ROI, choose the project with the highest

ROI

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Example
Suppose we have the following projections for a project
we need to decide whether to start or not

Project A Project B Project C

Year 0 € (50,000.00) € (20,000.00) € (15,000.00)

Year 1 € 30,000.00 € (10,000.00) € 15,000.00

Year 2 € 30,000.00 € 10,000.00 € 1,000.00

Year 3 € 1,000.00 € 60,000.00

Year 4 € 1,000.00 € 50,000.00

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Example
• Project A
– Profit = 62000 - 50000 = 12000
– Annual Profit = 12000 / 5 = 2400
– ROI = 2400 / 50000 = 0.05 = 5%

• Project B
– Profit = 120000 - 30000 = 90000
– Annual Profit = 90000 / 5 = 18000
– ROI = 18000 / 30000 = 0.6= 60%
• Project C
– Profit = 16000 - 15000 = 1000
– Annual Profit = 1000 / 3 = 333
– ROI = 333 /15000 = 0.02= 2%
SOLUTION: Project B (highest ROI)

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Discounted Cash Flows/Inflation
• The value of money decreases over the years (inflation!) according to
the inverse compound interests formula

1
Discount Factor =
(1 + i) n

• Thus, giving it the money we invest now the same weight of money we
will get in five year is over optimistic
• DCF (Discounted Cash Flows) are techniques that take into account
inflation

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Net Present Value

Net Present Value discounts sums in the

future in order to provide a more realistic
comparison between presents investments
and future gains

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Net Present Value Example
Hypothesis 1
Discount Rate: 10% Discount Factor =
(1 + i) n
(this is “i”)

Year (n) Cash Flow Discount Factor Present Value

0 € (35,000.00) 1.00 € (35,000.00)
1 € 10,000.00 0.91 € 9,090.91
2 € 15,000.00 0.83 € 12,396.69
3 € 20,000.00 0.75 € 15,026.30
Expenditure € (35,000.00) € (35,000.00)
Gains € 45,000.00 € 36,513.90
Profit € 10,000.00 € 1,513.90

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Net Present Value: Discussion
• Advantages
– More accurate profit-loss data

• Disadvantages
– It uses a fixed discount rate (may be unrealistic)
– It favors shorter terms projects

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Score Matrices
• The financial methods (Payback, ROI, NPV) look only at
some of the financial data
• Scoring matrices allow one to take into account other
factors
• They are based on a standardized set of criteria and
weights, which highlight the relevant features of a
project
• A qualitative evaluation of how a project scores with
respect to each criteria positions the project on a scale
and helps compare it with past or competing projects

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A score matrix
• Is a list of project criteria, each of which is assigned a weight, which measures
the importance the criteria have for us or for the organization we work for.
• The criteria highlight the desirable and undesirable aspects of a project; the
weights of desirable features are positive numbers (e.g., from 1 to 5) and the
weights of undesirable features are negative numbers (e.g., from −1 to −5).
• When we evaluate a project using a score matrix, we measure how well the
project satisfies each criterion we have identified, for instance, by assigning a
number from 1 (very low) to 5 (very high).
• We then multiply the scores with the weights and sum all values.
• Projects scoring a higher value are more desirable than projects with a lower
score.
• Projects can also be compared side by side; hence, the use of the term
“matrix” in the name of the technique.
Example

manage

20 11 15
Score Matrix Example
Factor Value Weight SUM Comment
The project aligns with the YES 2 2
strategic objectives

The project has a profit > 20% NO 4 0

Payback period < 2 years YES 5 5
Enlarges the customer base YES 2 2
The project requires a NO 3 0
standard
technology YES 1 1
The quality constraints are
simple to meet NO 4 0
The timing is not too tight YES 5 5
We have skilled personnel to do
the work
15

– Value can be binary (YES/NO) or a number (e.g. from 1 to 5)

and measures how well the project meets the requirement
– The weight measures how important a factor is for the decision

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Discussion
• Advantages
– Simple
– It encourages standardization and more objectivity in decision
making
– It helps discuss and evaluate the project characteristics
– It widens the range of evaluation
– Not biased toward shorter term projects

• Disadvantages
– A simple model may encourage development of long and
useless lists
– Different factors have same importance (unless the weight
matrix is used)

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SWOT analysis
• Technique credited to Albert Humphrey
• Systematic analysis of:
– Strengths
– Weaknesses
– Opportunities
– Threats

... to understand the feasibility of a project and/or come

out with achievable project goals
• Often presented as a 2x2 matrix, with each cell listing all
elements of a given type (see next slide)

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Source: [Link] (cc license)
SWOT: Some factors to consider

• Strengths: • Weaknesses:
– Competences – Disadvantages
– Selling points – Methodology
– ... – Timing
– Capability Gaps

• Opportunities: • Threats:
– Market and Industry – Market and Industry trends
trends – Competing technologies
– Weaknesses of – Sustainability
competitors

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Stakeholder Analysis
• Goal: understanding who are the project stakeholders
and the influence they have on the project
• Different techniques available
• One technique organizes stakeholders in a 2x2 matrix
in which:
– one dimension measures the power a stakeholder can exert
(low or high)
– the other dimension measures the interest a stakeholder has
in a project (negative or positive)

• This allows to define specific management policies for

the different stakeholders

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Interest
The Feasibility Study
Feasibility Study
• The feasibility study is the document that allows to
formally authorize a project and to link it to the
organization’s goals

– Wide range of outputs: from a few to hundreds of pages

(according to complexity and formality)
– The feasibility study can be thought of as a project in the
small, drafting the main information we will define in more
details during the project
– Basis for project selection: Management must choose what
projects to activate.

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Goals of a Feasibility Study
• Identify:
– the project goals
– the project constraints

• Assess value and risks (using the techniques above)

• Ensure the project lines up with
– the customer objectives
– the performing organization objectives

• Demonstrate that the project goals

– can be achieved respecting the quality, cost, and time
constraints

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Feasibility Document: Structure
– A statement of work, which – An analysis of the
describes what the project will stakeholders.
accomplish. – The project risks.
– The business objectives – Possible alternatives to the
(value) of the project or its project, such as a make or
outputs and information about buy decision.
the business model, if relevant.
– An evaluation of the project
– A summary of the project and of the alternatives, using
budget, which forecasts the techniques described
expenses and incomes. above.
– A summary of the project
milestones, that is, a rough
schedule of the project
identifying the most important
events.
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Feasibility: Additional Considerations
• The feasibility document has a value for:
– The client, since it helps understand the way
forward and what are the short and long term
perspectives
– The performing organization, since it helps
understand whether it makes sense to move on with
a project
– The project manager, since it helps understand
whether the project will be in the manager’s
comfort zone or not (and take an informed decision
on whether the project is worth taking or not)

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The Project Approval Process
• The process which brings to the project approval is
more or less structured according to the practices of the
performing organization
• It is organized in the following steps:
– Upon receiving a request, identify a (preliminary) project
manager
– The project manager prepares a feasibility study which is
agreed with the customer and key stakeholders
– The project manager submits the document for authorization
– The document is analyzed and a formal decision is taken
– The project manager is appointed and the project moves to
the planning phase

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