BMM 3023 ENGINEERING MANAGEMENT & SAFETY

PROJECT REPORT

STUDENT NAME

STUDENT ID NO

SARINDRAN RAMAYES

MH14002

SHARWESSWARAN A/L KALITHEVAN

MA14021

ASHWINDRAN NAIDU S/O SANDERASAGRAN

MA14204

MUHAMMAD REDZUAD RAS BIN ABDUL RASK

MH14029

AMIERUL AMIN BIN ABDUL AZIZ

MA14203

GANESAN A/L GOPALKRISHNAN

MA14134

DINESWAR A/L KUMARAN

MA14127

Lecturer

: Dr. Ir. MOHD RASHIDI BIN MAAROF

Submission Date : 25th May 2016

Faculty of Mechanical Engineering

UNIVERSITI MALAYSIA PAHANG

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Table of Contents

Introduction ................................................................................................................................... 3
1.1

Project Introduction ................................................................................................................ 3

1.2

Project Criteria ........................................................................................................................ 4

Major Characteristics of Project ................................................................................................. 5

2.1

Specified Major Characteristics .............................................................................................. 6

The Understanding of Project Management of Process for Company Xyz Sdn. Bhd. ........... 7

Mistake by Not Understanding the Project Role in Accomplishing Strategy ........................ 10

An Overview of Strategic Management Process ...................................................................... 12

5.1

Strategy Formulation ............................................................................................................ 12

5.2

Implementation ..................................................................................................................... 13

5.3

Evaluation and Control ......................................................................................................... 13

Project Portfolio System Based On Financial Models ............................................................. 15

6.1

Payback Period...................................................................................................................... 16

6.2

Net Present Value ................................................................................................................. 18

6.3

Discounted Payback .............................................................................................................. 20

6.4

Internal Rate of Return.......................................................................................................... 20

Project Portfolio System with Project Proposal Model ........................................................... 23

7.1

Introduction to PPM .............................................................................................................. 23

7.2

Strategy ................................................................................................................................. 23

7.3

The Scoring Model ............................................................................................................... 24

7.4

Project Portfolio Management - Value in Term of Resources ............................................. 26

7.5

Portfolio Balance .................................................................................................................. 26

7.6

Strategic Alignment .............................................................................................................. 26

Definition of A Project ................................................................................................................ 27

8.1

Project Scope ........................................................................................................................ 27

8.2

Project Priority ...................................................................................................................... 28

8.2.1
8.3

Matrix Structure ............................................................................................................ 28

Work Breakdown Structure (WBS) ...................................................................................... 29

8.3.1

WBS Development ....................................................................................................... 29

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1 Introduction
1.1 Project Introduction
XYZ Sdn Bhd is a company which was setup to tap an opportunity in supplying oil and gas
spare parts either on or off shore. The potential constituents include pumps and impeller
components, gear box, motor casing, customized component and relevant engineering
component which can be reverse engineered from its original equipment manufacturer (OEM).
Companys director is convinced they can enter the market by offering their customer
of localization manufacturer (localization is critical when Ringgit Malaysia is comparatively
cheaper than Dollar. So, product which was manufactured internally instead of import is
competitively cheaper). Furthermore, the company is having expertise in metallurgy, process,
and reverse engineering method. However, the purchase order from customers is not receive
just yet. Customer wants to take an audit of ISO9001 and Quality Management System (QMS)
before they have faith and awarded the purchase order from XYZ Sdn.Bhd. After careful macro
analysis, board of director discovered the value of initial investment required is around RM1.5
million.
So, companys director need a decision either they should invest (in term of premises
expansion, hiring additional workforce (engineers, technical team etc.), purchasing reversed
engineering equipment and apparatus etc.) to prepare themselves for the audit session or not?
They are aware the implication of money, resources, time and effort taken should they dare to
invest. They also aware that if the audit going wrong, they also lose their customer and all of
their previous investment. However, if they successfully convinced the customer, they will be
awarded RM500000 purchase order annually for 5 years. With a margin of 25%, the probable
market is looking good. The customer also eager to help the company by introducing them to
another potential customer should they satisfied with present performance.
As future engineer, help the companys director by preparing a working paper (in view of
project management) either to invest or not. In your paper, you need to elaborate, discuss and
give critical review of the investment required as a project base on:

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1.2 Project Criteria

First and foremost, the important criteria of the project that XYZ Sdn Bhd has to look into are:
1. Major characteristic of the project itself.
2. The understanding of project management process.
3. Mistake by not understanding the project role in accomplishing strategy.
4. An overview of strategic management process.
5. Project portfolio system based on financial models.
6. Project portfolio system with project proposal model (sources, ranking and managing
the portfolio).
7. Definition of a project including - project scope, project priority, work breakdown
structure (WBS), integrating the WBS with the organisation and coding of WBS with
system information.

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2 Major Characteristics of Project

Before the project is commenced by XYZ Sdn Bhd, it is important to understand the major
characteristics a project and all its criteria must be taken into account before starting this
project. While no two projects are indistinguishable, there are three key attributes that all
projects should have. These three attributes should dependably be considered when settling on
a choice inside a venture furthermore give limitations to the conveyance of the goal.
First attribute will be time (now and again known as time period or timetable). This
alludes to what extent the project will take, and for the most part includes utilizing past
experience to predicate the imaginable time that parts of a task will take. The scheduling
required in a project shows what ought to happen when and there are typically parts that can't
happen until going before parts are finished. This is the case where XYZ Sdn Bhd will discuss
how long the project life span as well as the beginning period and end period of effectiveness
of this oil and gas spare part supplying project.
Next attribute is the scope of the project. Scope alludes to what is incorporated inside
the project and what is avoided. This is the place where XYZ Sdn Bhd will establish whether
or not oil and gas spare part supplying is in scope, obtaining spare parts from local
manufacturers are in scope, is having expertise in metallurgy, process, and reverse engineering
method is in scope, and, is premises expansion, hiring additional workforce (engineers,
technical team etc.), purchasing reversed engineering equipment and apparatus etc. are in
scope. The clearer the scope, the easier for ambiguity to be reduced and risks minimised
Thirdly, cost (otherwise called spending plan) is also an important attribute to be taken
into account. The financial backing or cost of the task sets out to desire with respect to how
much the venture will cost. Cost will be quoted by taking into account the initial investment
for purchasing spare parts, labour cost, shipping of parts to off shore and etc.

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2.1 Specified Major Characteristics

Following are the specified major characteristics of project XYZ Sdn Bhd need to take
into account.
i.

Has an established objective.

Objective of XYZ Sdn Bhds project is to tap into the opportunity in supplying
oil and gas spare parts either on or off shore which are manufactures internally
instead of imported as the rate is cheaper.

ii.

Has a defined life span with a beginning and an end.

The beginning of the project is from the approval of XYZ Sdn Bhds first
customers purchase order secured for the first 5 years. The project will be ended
if no promising income after the regain of profit or if profit margin drops below
25%.

iii.

Requires across-the-organizational participation.

Organizational participant of XYZ Sdn Bhd to date are the experts team in
metallurgy, process, and reverse engineering method. XYZ Sdn. BHd has bonds
with localized oil and gas spare part manufacturers. Additional workforce
(engineers, technical team etc.) are to be hired by the company.

iv.

Involves doing something never been done before.

XYZ Sdn Bhd if offering its customers with localized manufactured oil and gas
spare parts. Confinement is basic when Ringgit Malaysia is relatively less
expensive than Dollar. In this way, item which was manufactured locally in
Malaysia rather than import is intensely less expensive which will attract
customers.

v.

Has specific time, cost, and performance requirements.

XYZ Sdn Bhd will be making an initial investment of RM1.5 million. Upon
projects success the company will be awarded with a RM500000 purchase
order from its customer annually for the following 5 years. With a set profit
margin of 25%, the market of the company will look promising. If this
performance turns to be satisfying for customers, market and customer growth
is expected. To boost performance XYZ Sdn Bhd is also planning for an
premises expansion as well as purchasing reversed engineering equipment and
apparatus.

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3 The Understanding of Project Management of Process for

Company Xyz Sdn. Bhd.
There are many ways of understanding these project management processes for company XYZ
Sdn Bhd which have opportunity in supplying oil and gas.

1) Strategy
Ensuring better strategic alignment requires, first and foremost, that companies decide
on the distinct roles of headquarters and subsidiaries in capital project prioritization and
management. This process will then help them to design appropriate matrices for all
roles and responsibilities and the relevant business processes, and to define the proper
set of management tools and control procedures to be used at headquarters, such as
policies and standards, key performance indicators, and personnel development.
Typically, headquarters sets the standards and assumptions to be used by subsidiaries
to evaluate potential projects. The standards are then incorporated into the subsidiaries
business plans. Subsidiaries should defend their investment plans in front of investment
or strategic committees before receiving the necessary funds. Depending on the
anticipated capital expenditure needed for each project, and its strategic importance,
headquarters should determine which projects will be controlled at the companys
highest level, and which are small enough to be managed by subsidiaries. Similarly,
companies must develop and analyse all possible alternatives for how each project is
carried out, including whether strategic partners should be involved. In such cases,
however, it is critical to test the performance of potential partners by devising and
running pilot projects with them or including them in distinct phases of a project.

2) Processes
Once the overall strategy is decided on, companies must plan how they intend to carry
out specific projects. Modern planning processes are key at this stage. Most global
companies now employ front-end loading (FEL), which involves planning carefully
enough in the early stages of the planning process to ensure that expensive changes will
not have to be made during implementation. At one international oil and gas company,

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for example, poor FEL efforts led to just one or two departments being involved in the
planning process, which didnt take into account a wide variety of critical crossfunctional issues. That resulted in several problems, such as the underutilization of
proven project engineering solutions problems that were not uncovered until the
project was under construction. The company has since launched a number of initiatives
aimed at improving its FEL processes, including the formation of a common
mechanism for data collection from all departments, double checking the assumptions
used to calculate business cases, and even a major effort to change the engineering
culture underlying the companys planning processes. Second, optimal project
management requires a disciplined stage-gate process whereby a projects progress is
analysed and confirmed at predetermined points during planning, testing, and
implementation, using a variety of key metrics. Does the entire team continue to
understand clearly the goals of the project? Are the proper management techniques and
resources being directed to the project? Is the project management structure still
optimal? Are top management and the project sponsors continuing to adequately
support the project? Has the estimation of the projects eventual return on investment
changed?

3) Governance
All large-scale capital projects should be managed by an overarching project office
empowered to make the decisions necessary to implement and complete the project
successfully. The office should also be responsible for ensuring smooth crossfunctional interactions and access to all relevant project information from every
department, as well as from the project office itself. The office should also control the
pace of implementation through analysis of data at each stage gate, and use that
information to make appropriate decisions on budget and resource allocation. Because
accurate and transparent data is so critical an element of efficient project management,
the project office should determine what information should be collected, how often,
and by whom. For projects involving several different departments, the office should
act as the central hub for all analytics. Smaller projects implemented within a single
department need not maintain separate centres to oversee data collection and analysis.
If a large capital project involves a joint venture with one or more other companies, the

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controlling company should choose an appropriate governance model that best suits the
projects needs.

The most important of understanding for the understanding of the project management are:
i.

Improve project quality through the standardization of processes and introduction

of advanced technologies.

ii.

Provide expert support to project teams.

iii.

Identify, study, and introduce new technologies.

iv.

Manage advanced training for technical personnel. All large-scale capital projects
should be managed by an overarching project office.

v.

Oversee relationships with suppliers of equipment and technology, and in some

cases, coordinate research with higher education institutions in Russia and
international organizations.

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4 Mistake by Not Understanding the Project Role in

Accomplishing Strategy
Overseeing danger and opportunity is a constant procedure that obliges organizations to
consider the most widely recognized dangers, as well as to have experience alleviating
surprising occasions. In the oil and gas industry, it's never been more vital to oversee wellbeing,
security and natural dangers, given the rising multifaceted nature of operations and the nearby
examination by controllers and partners. Hazard distinguishing proof and assessment is a
ceaseless procedure all through a venture's life cycle and over the task portfolio, taking a
systemic point of view that considers extends, their stages and applicable dangers.
Driving organizations work with temporary workers to decide how hazard and
opportunity will be shared. This can fashion a much nearer relationship than basically
attempting to exchange danger to contractual workers while decreasing cost and hazard for the
overseeing association.
Specialists and manufacturers in the oil and gas industry face overwhelming and
remarkable difficulties as they outline and build the framework to concentrate and process the
assets that resolve the worldwide economy throughout the following couple of decades. Couple
of expansive undertakings in the arranging stages will stand the test of time like the Colosseum.
In any case, that doesn't reduce their significance or propose they ought to be embraced with
any less thoroughness. As the oil and gas industry leaves on another era of real ventures,
venture directors should depend on rational, predictable reference structures that guide their
choices and connect with the most skilled ability they can discover so as to keep pace.
This is the second of the most common project management mistakes. Lack of
methodology increases the risk that tasks related to the project will fall through the cracks, that
projects will have to be re-worked, and ultimately that a project won't be completed on time or
on budget. Proper project staffing is critical, yet improperly allocating resources tops the list
of most common project management mistakes. Not having the right people on a project can
kill it. "The key to getting a project successfully accomplished is getting the right people with
the right skills," says Joel Koppelman, CEO of project management software vendor
Primavera. "All the planning in the world won't overcome an insufficiency of talent." Focusing
on problems or solutions with low strategic priority. Focusing on the immediate customer
rather than the whole market place and value chain. Overemphasizing technology that results
in projects that pursue exotic technology that does not fit the strategy or customer need. Trying

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to solve customer issues with a product or service rather than focusing on the 20% with 80%
of the value (Paretos Law). Engaging in a never-ending search for perfection only the project
team really cares about.

The most common major mistakes of not understanding a project role in XYZ Sdn. Bhd. are:
Lack of experienced owner and contractor sources.
Overall quality of owner and contractor management capabilities.
Ineffective organizational and alliance structures for mega projects.
Inappropriate delegation of owner responsibilities to contractors.
Lack of clear definition of lines of authority and management responsibilities.
Lack of discipline and ineffective control of project scope.
Complexities of major expansions to existing operating plant.
Customization of owner specification requirements,
Level of project definition and proximity not well understood.
Lack of familiarity with the climate, safety requirements, environmental constraints,
governmental regulations, construction practices.
Scarcity of qualified craft workers, high labour costs, inconsistent productivity.
Many completing mega-projects affecting resources and labour availability.
Ineffective contractual arrangements and lucrative contracting environment.
Ineffective material management plans and premature field mobilization.
Inappropriate management influence of cost estimates to meet economic hurdles and
ignoring project reality.
Ineffective project control systems and project development practices.
Lack of discipline and consistent application of project code of accounts to allow
effective control and collection of actual costs.
Lack of owner front-end estimating capability and project control personnel.
Lack of appropriate risk analysis expertise.

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5 An Overview of Strategic Management Process

Strategic management is a continuous process. There are three stages in this process: strategy
formulation, strategy implementation, and evaluation and control. Strategy management is also
viewed as series of steps. Therefore, the strategic- management process can be best be studied
and applied using the model. A review of the major strategic management models indicates
that they all include the following steps: performing an environmental analysis, establishing
organizational direction, formulating organizational strategy, implementing organizational
strategy, evaluating and controlling strategy.
The strategic management process mostly involves top management, board of directors,
and planning staff. In its final form, a strategic decision is molded from the streams of inputs,
decisions, and actions.
All organizations engage in the strategic management process. The success of an
organization is generally dependent upon the strategic management and organizational abilities
of the managers.
Many research studies show both financial and nonfinancial benefits which can be
derived from a strategic-management approach to decision making.
Moreover, the concept of strategic management is still involving and will continue to
undergo change. Therefore, understanding and following and complete process of strategic
management can be helpful to practicing managers to gain organizations' objectives.

5.1 Strategy Formulation

a) Analysis Strategic analysis is a time-consuming process, involving comprehensive
market research on the external and competitive environments as well as extensive
internal assessments. The process involves conducting Porter's Five Forces, SWOT,
PESTEL, and value chain analyses and gathering experts in each industry relating to
the strategy.

b) Strategy Formation Following the analysis phase, the organization selects a generic
strategy (for example, low-cost, differentiation, etc.) based upon the value-chain
implications for core competence and potential competitive advantage. Risk

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assessments and contingency plans are also developed based upon external forecasting.
Brand positioning and image should be solidified.

c) Goal Setting With the defined strategy in mind, management identifies and
communicates goals and objectives that correlate to the predicted outcomes, strengths,
and opportunities. These objectives include quantitative ways to measure the success
or failure of the goals, along with corresponding organizational policy. Goal setting is
the final phase before implementation begins.

5.2 Implementation
a. Structure The implementation phase begins with the strategy in place, and the
business solidifies its organizational structure and leadership (making changes if
necessary). Leaders allocate resources to specific projects and enact any necessary
strategic partnerships.

b. Feedback During the final stage of strategy, all budgetary figures are submitted for
evaluation. Financial ratios should be calculated and performance reviews delivered to
relevant personnel and departments. This information will be used to restart the planning
process, or reinforce the success of the previous strategy.

5.3 Evaluation and Control

Strategy evaluation and control actions include performance measurements, consistent review
of internal and external issues and making corrective actions when necessary. Any successful
evaluation of the strategy begins with defining the parameters to be measured. These
parameters should mirror the goals set. Determine your progress by measuring the actual results
versus the plan. Monitoring internal and external issues will also enable you to react to any
substantial change in your business environment. If you determine that the strategy is not
moving the company toward its goal, take corrective actions. If those actions are not successful,
then repeat the strategic management process. Because internal and external issues are
constantly evolving, any data gained in this stage should be retained to help with any future
strategies.

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Formulation: We develop strategic

plans to prepare for the future.

--

page 14

Implementation: We then put

strategic plans into practice.

Evaluation: We evaluate to know how good

our strategic plans are and how well they are
being implemented.

Control: The information we get from evaluation enables us to exercise better control.
This means we are able to make better plans and improve the way we implement such
plans.

Figure 1: The role of evaluation and control in strategic

From Figure 1 we can see that as strategic managers, we must be able to express proper control
over the strategic management process; that is, we must know how well our strategic plans are
formulated and implemented, and where necessary, what corrective action can be taken to
improve performance. Finding out what is going on is what evaluation is all about. It means
collecting information about how well the strategic plan is progressing. Once we have the
evaluation results, then we must decide on the appropriate action. If, according to our
evaluation, everything is going well, then we have no problem; all we need to do is to continue
doing what we are doing (or try to do better!). However, if our evaluation shows that some
things are not going well, then we have to take care of these trouble spots and eliminate them.
Are our goals, objectives and/or implementation plans so ambitious that they cannot be
achieved? Then perhaps we should be more realistic and bring them down to earth. Are our
people not well enough prepared to follow the implementation process? Then we may have to
prepare job aids or give training.
Evaluation is really just a part of the overall control process, but it is a very important
part. Without it, managers may end up making the wrong decisions. Because of this close
relationship between evaluation and control, it is common to talk of them as though they were
one and the same thing.

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Finally, we can conclude the overview of strategic management process as the flowchart below.

Flowchart 1: Strategic Management Process

6 Project Portfolio System Based On Financial Models

Another important series of models relies on financial analysis to make project selection
decisions. In this section, we will examine three common financial models: discounted cash
flow analysis, net present value, and internal rate of return. These are not the only financial
methods for assessing project alternatives, but they are among the more popular.
Financial models are all predicated on the time value of money principle. The time
value of money suggests that money earned today is worth more than money we expect to earn
in the future. In other words, RM1.5 million that I receive five years from now is worth
significantly less to me than if I were to receive that money today. In the simplest example, we
can see that putting RM500000 in a bank account at 3% interest will grow the money at a
compounded rate each year. Hence, at the end of year 1, the initial investment will be worth
RM515000. After two years, it will have grown to RM530000, and so forth. The principle also
works in reverse: To calculate the present value of RM1.5 million that I expect to have in the
bank in five years time I must first discount the amount by the same interest rate. Hence,

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assuming an interest rate of 25%, I need only invest RM125000 today to yield RM625000 in
five years.
There are two reasons why we would expect future money to be worth less: the impact
of inflation, and the inability to invest the money. Inflation, as we know, causes prices to rise
and hence erodes consumers spending power. Money that we cannot invest is money that earns
no interest. In real terms, therefore, the real, present value of money must be discounted by
some factor the farther out into the future I expect to receive it. When deciding among nearly
identical project alternatives, if Project A will earn our firm RM500,000 in five years.

6.1 Payback Period

The intent of project payback period is to estimate the amount of time that will be necessary to
recoup the investment in a project; that is, how long it will take for the project to pay back its
initial budget and begin to generate positive cash flow for the company. In determining payback
period for a project, we must employ a discounted cash flow analysis, based on the principal
of the time value of money. The goal of the discounted cash flow (DCF) method is to estimate
cash outlays and expected cash inflows resulting from investment in a project. All potential
costs of development (most of which are contained in the project budget) are assessed and
projected prior to the decision to initiate the project.
We then apply to this calculation a discount rate based on the firms cost of capital. The
value of that rate is weighted across each source of capital to which the firm has access
(typically, debt and equity markets). In this way we weight the cost of capital, which can be
calculated as follows:

= ()()( ) + ()()

The weighted cost of capital is the percentage of capital derived from either debt (wd)
or equity (we) times the percentage costs of debt and equity (kd and ke, respectively). (The
value t refers to the companys marginal tax rate: Because interest payments are tax deductible,
we calculate the cost of debt after taxes.) There is a standard formula for payback calculations:

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Payback Period = Investment/Annual Cash Savings

The reciprocal of this formula can be used to calculate the average rate of return for the
project. Once cost of capital has been calculated, we can set up a table projecting costs and
revenue streams that are discounted at the calculated rate. The key is to determine how long it
will take the firm to reach the breakeven point on a new project. Breakeven point represents
the amount of time necessary to recover the initial investment of capital in the project. Shorter
paybacks are more desirable than longer paybacks, primarily because the farther we have to
project payback into the future, the greater the potential for additional risk.
Our company wants to determine which of the financial backing or cost of the task sets
out to desire with respect to how much the venture will cost. Cost will be quoted by taking into
account the initial investment for purchasing spare parts, labour cost, shipping of parts to off
shore and etc.

Table 1: Payback for Project

Project A

Payback = 5 years
Rate of Return =25%

Year

Cash Flow
(RM)

Cum. Cash Flow

(RM)

500,000

500,000

225,000

220,000

250,000

230,000

220,000

250,000

305,000

300,000

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6.2 Net Present Value

The most popular financial decision-making approach in project selection, the net present value
(NPV) method, projects the change in the firms value if a project is undertaken. Thus a positive
NPV indicates that the firm will make moneyand its value will riseas a result of the project.
Net present value also employs discounted cash flow analysis, discounting future streams of
income to estimate the present value of money. The simplified formula for NPV is as follows:
The optimal procedure for developing an NPV calculation consists of several steps,
including the construction of a table listing the outflows, inflows, discount rate, and discounted
cash flows across the relevant time periods.
Net Present Value
Assume that you are considering whether or not to invest in a project that will cost
RM1.5 million in initial investment. Your company requires a rate of return of 25%.You
anticipate a useful life of five years for the project and have projected future cash flows as
follows:
Year 1: RM20,000
Year 2: RM30,000
Year 3: RM25,000
Year 4: RM20,000
Year 5: RM20,000

We know the formula for determining NPV:

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We can now construct a simple table to keep a running score on discounted cash flows (both
inflows and outflows) to see if the project is worth its initial investment. We already know that
we will need the following categories: Year, Inflows, Outflows, and NPV. We will also need
two more categories:
Net flows:

just the difference between inflows and outflows

In table below, if we fill in the Discount Factor column assuming that k = 25% and p =
5%, we can begin work on the NPV. Note that Year 0 means the present time, Year 1 the first
year of operation.

Table 2: Discounted Cash Flow and NPV

Year

Inflows

Outflows

Net Flow

125,000

125,000

Discount Factor
1.000

NPV
125,000

20,000

20,000

0.8772

17,544

50,000

50,000

0.7695

38,475

50,000

50,000

0.6749

33,745

25,000

25,000

0.5921

14,803

Total

RM4,567

Net present value is one of the most common project selection methods in use today.
Its principal advantage is that it allows firms to link project alternatives to financial
performance, better ensuring that the projects a company does choose to invest its resources in
are likely to generate profit. Among its disadvantages is the difficulty in using NPV to make
accurate long-term predictions. For example, suppose that we were considering investing in a
project with an expectation that it would continue to generate returns over the next 10 years. In
choosing whether or not to invest in the project today, we must make some assumptions about
the future interest rates and our required rate of return (RRR) for the next 10 years. In uncertain
financial or economic times, it can be risky to make long-term investment decisions when
discount rates may fluctuate.

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6.3 Discounted Payback

Now that we have considered the time value of money, as shown in the NPV method, we can
apply this logic to the simple payback model to create a screening and selection model with a
bit more power. Remember that with NPV we use discounted cash flow as our means to decide
whether or not to invest in a project opportunity. Now, lets apply that same principle to the
discounted payback method. Under the discounted payback method, the time period we are
interested in is the length of time until the sum of the discounted cash flows is equal to the
initial investment.
The advantage of the discounted payback method is that it allows us to make a more
intelligent determination of the length of time needed to satisfy the initial project investment.
That is, while simple payback is useful for accounting purposes, discounted payback is actually
more representative of financial realities that all organizations must consider when pursuing
projects. The effects of inflation and future investment opportunities do matter with individual
investment decisions and so, should also matter when evaluating project opportunities.

6.4 Internal Rate of Return

Internal rate of return (IRR) is an alternative method for evaluating the expected outlays and
income associated with a new project investment opportunity.

Table 3: Discounted Payback Method

Project Cash Flow

Year
1
2
3
4
5

Discounted(RM)
8,900
7,900
7,000
6,200
5,500

Undiscounted(RM)
10,000
10,000
10,000
10,000
10,000

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Without detailing the mathematics of the process, we will say only that IRR is the discount rate
that equates the present values of a projects revenue and expense streams. If a project has a
life of time t, the IRR is defined as:

= ( + ) =
Where:
IO = the initial cash outlay
n = the projects expected life
IRR = the projects internal rate of return

IRR is found through a straightforward process, although it requires tables representing

present value of an annuity in order to determine the projects rate of return. Alternatively,
many pocket calculators can determine IRR quickly. Without such tables or access to a
calculator, it is necessary to employ an iterative process to identify the approximate IRR for
the project.
Lets take a simple example. Suppose that a project required an initial cash investment
of RM500,000 and was expected to generate inflows of RM25,00, RM25,000, RM25,000,
RM25,000 and RM25,000 for the next five years. Further, assume that our companys required
rate of return for new projects is 25%. The question is: Is this project worth funding?
Using our example, we know:

Cash investment

= RM500,000

Year 1 inflow

= RM25,000

Year 2 inflow

= RM25,000

Year 3 inflow

= RM25,000

Year 4 inflow

= RM25,000

Year 5 inflow

= RM25,000

Rate of Return

= 25%

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If the IRR is greater than or equal to the companys required rate of return, the project
is worth funding. In the example above, we found that the IRR is 25% for the project is a good
candidate for investment. The advantage of using IRR analysis lies in its ability to compare
alternative projects from the perspective of expected return on investment (ROI). Projects
having higher IRR are generally superior to those having lower IRR.
IRR does, however, have some disadvantages. First, it is not the rate of return for a
project. In fact, IRR equals the projects rate of return only when project-generated cash
inflows can be reinvested in new projects at similar rates of return. If the firm can reinvest
revenues only on lower-return projects, the real return on the project is something less than
the calculated IRR. Several other problems with IRR make NPV a more robust determinant of
project viability:16
a. IRR and NPV calculations typically agree (that is, make the same investment
recommendations) only when projects are independent of each other. If projects are not
mutually exclusive, IRR and NPV may rank them differently. The reason is that NPV
employs a weighted average cost of capital discount rate that reflects potential reinvestment
while IRR does not. Because of this distinction, NPV is generally preferred as a more
realistic measure of investment opportunity.
b. If cash flows are not normal, IRR may arrive at multiple solutions. For example, if net
outflows follow a period of net cash inflows, IRR may give conflicting results. If, following
the completion of plant construction, it is necessary to invest in land reclamation or other
incidental but significant expenses, an IRR calculation may result in multiple return rates,
only one of which is correct.

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7 Project Portfolio System with Project Proposal Model

Project Portfolio Management (PPM) is the centralized management of the processes, methods,
and technologies used by project managers and project management offices (PMOs) to analyze
and collectively manage current or proposed projects based on numerous key characteristics.
The objectives of PPM are to determine the optimal resource mix for delivery and to schedule
activities to best achieve an organizations operational and financial goals while honouring
constraints imposed by customers, strategic objectives, or external real-world factors.

7.1 Introduction to PPM

The company to be discussed in this article is one of the largest oil and gas producers in the
world. In this particular case we will examine the portfolio management system designed by
one of the organization's regional IT departments.
The situation at the company was such that all the major IT projects were undertaken
by the company headquarters, while the local IT departments were responsible mainly for
servicing the needs of the offshore platforms. The executives of the regional department felt
under constant pressure as many of the projects proposed by them, were denied by the
headquarters an, yet, they remained responsible for the safety, reliability and security of all the
offshore operations.
As a result, they felt that creation of a portfolio scoring model would help them with
(a) prioritization of their project proposals and (b) demonstration of the importance of their
initiatives to the executive managers at the headquarters.

7.2 Strategy
The overall company strategy has been developed at the organizational headquarters and
consisted of approximately ten strategic initiatives. However, the strategies directly related to
the regional offices were:
Safety and reliability of all the operations
a. Fiscal responsibility
b. Simpler and more standardized procedures

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7.3 The Scoring Model

The scoring model created as a result of a one-day facilitated project portfolio management
session is presented in Table.

Table 4: Project Portfolio Management

As can been seen it was a very unusual model when compared to other scoring matrices
described in the book. One may call it a purely risk-based approach to project prioritization.

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The model included the following variables:

a. Age of the Technology Platform or System - the project can be awarded between 1 and
5 points based on the age of the system
b. Business Implications of the Risk - the proposal received 1 point if the system failure
would disrupt noncore (minor, internal) company operations, 3 points if it would disrupt
external-facing company operations, and 5 points for the potential disruption of the site
(platform) operations
c. Platform or System Supportability - the initiative would receive between 1 and 5 points
depending on the degree of vendor support
d. Platform or System Intricacy - the project could be awarded either 1, 3 or 5 points for
the system serving either few, several or many business units
e. Historical Probability of Failure - again, the proposal could be awarded either 1, 3 or 5
points for low, medium or high historical probability of failure of such systems in the
past
f. Risk Register - finally the project received either 1 or 5 points depending on whether it
has been added to the company-wide risk register.
Therefore, a project proposal could receive between six and thirty points allowing for a very
quick prioritization of the initiatives. In addition, the executives decided to designate the
following ranges for the points awarded:
a. High Risk = 22-30 points - a "Must Do" project category; projects that must be initiated
immediately
b. Medium Risk = 14-21 points - a "Should Do" project category; projects that should be
approved or in special circumstances deferred maximum by a year
c. Low Risk = 6-13 points - a "Nice to Do" project category; projects that can be postponed
by 2-3 years and revisited by that time.

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7.4 Project Portfolio Management - Value in Term of Resources

Figure 1: Value in Term of Resources

7.5 Portfolio Balance

No portfolio balance requirements were imposed on the model in question, mainly due to the
fact that all of the projects run by the local IT department would fall into low-risk, low reward
category.

7.6 Strategic Alignment

Since this particular risk-based selection and prioritization model had direct linkage to the
safety and fiscal responsibility initiatives outlined in the strategy section, and due to the fact
that all of the projects would have fallen into the "maintenance" project category, the executives
decided not to designate any special buckets. It was mentioned at the end of the exercise, that
once several years of data is accumulated it might be interesting to examine the project
breakdown by the platforms.

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8 Definition of A Project
8.1 Project Scope
The basic idea of project management is reflected in the implementation of initial ideas into
concrete results. As stated by J. Rothman, project management is particularly important if we
take into account that many risks over the lifetime of the project may appear: short terms, the
uncertainty of achieving the technical standards, the existence of a limited budget, inadequate
human resources, etc. Certain authors believe that project managers are those who are changing
modern business. According to H. Kerzner, the projects are essential to the success of the
enterprise. On the other hand, project management can be defined as a set of tools, techniques
and knowledge to be applied in order to achieve better project results .Project management is
one of the most important factors for successful implementation of enterprise activities
.Organizations that are operating in the fields of engineering and other technical domains are
particularly likely to operate a project oriented structure and therefore to rely, explicitly or
implicitly, on a cadre of professional project managers, largely drawn from among the ranks of
technical specialists, often on the assumption that a level of technical expertise is essential for
the effective oversight of the technical aspects of the work process . Essential for the
management of the project is well- organized job division. The success of the project is based
on the ability of managers to explain the project team their importance for achieving the project
results. Project managers must be able to choose the organizational structure which is
appropriate for their project and thus position their project for success. The primary role of the
project manager is to control the evolution and execution of the project on behalf of the
promoter. The project team forming is one of the most important preconditions for success in
the project. Well-organized project management can result in optimization of business
processes.
For example, certain processes within the project can be used to reduce the necessary
energy resources to achieve objectives in a particular phase of the project. As for the projects
within the oil industry, planning preparation of oil and gas drilling rigs must have the defined
work programs which include safety, minimum costs and usefulness.
Project management requires a division of the project into smaller steps or phases,
which is easier to manage. These phases, shown in flowchart 2 below, represent the specific
processes or process groups in project management.

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Flowchart 2: Project Scope

8.2 Project Priority

Functional organizational structure is characterized by the presence of certain specialty
functions which are coordinated by functional managers. This structure is mostly present within
enterprises that are continuously carrying out so-called operational processes. Project
implementation in this kind of organizational structure is quite difficult because of very often
misunderstanding between functional and project managers, due to project resource
scheduling.
Project organizational structure is characterized by the absolute orientation of companies
towards the project as a way of conducting business. This kind of organization is a projectoriented and thus facilitates the implementation of projects. The project team in this structure
is focused on completing the work of the project (i.e., developing the project deliverables). On
the other hand, the disadvantage of this type of organization is the potential under-utilization
of resources in full, depending on the quantity and quality of projects being implemented
simultaneously.

8.2.1 Matrix Structure

Matrix organizational structure is a combination of functional and project organization
structure, which tends to combine the advantages of aforementioned organizational structures,
along with reduction or elimination of disadvantages that they carry with them. Nevertheless,

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the three basic types of matrix structure are fraught with many distractions and complexities
all of which can lead to frustrations or project failure. The matrix is a mixed organizational
form in which the normal vertical hierarchy is overlaid by some form of lateral authority,
influence, or communication.
Matrix structure can be divided, in terms of degree of involvement in projects of employees
from various functions, to:
a. Weak matrix, similar to a functional organizational structure,
b. Strong matrix, similar to the project organizational structure, and
c. Balanced matrices, the combination of the two previous organizational structures.
Considered industrial enterprise in our research is forced to change its traditional functional
structure, due to the increasing demands of the global market. Realization of oil and gas drilling
operations is conducted exclusively through the projects, so the company has to organize its
business in the same way. Due to previously mentioned shortcomings of functional
organizational structure, and the impossibility of implementation of project organizational
structure, the company has seen the realization of projects based upon the practical
implementation of the matrix organizational structure.

8.3 Work Breakdown Structure (WBS)

A project work breakdown structure (WBS) is a deliverable or product-oriented grouping of
project work elements shown in graphical display to organize and subdivide the total work
scope of a project. The WBS is a particularly important project tool. Considerable thought and
planning should be given to its development and implementation so that subsequent changes
are minimized. Major revisions to a WBS require both substantial effort and resources, due to
its application to a wide array of project activities. Project WBSs, which are driven by the scope
of a project, should not be confused with other uses of WBS-like systems. MIL-HDBK-881 is
the accepted standard on WBS.

8.3.1 WBS Development

A WBS is the cornerstone of effective project planning, execution, controlling, stat using, and
reporting. All the work contained within the WBS is to be identified, estimated, scheduled, and
budgeted. The WBS is the structure and code that integrates and relates all project work (scope,

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schedule, and cost). Therefore, the WBS contains the projects scope baseline necessary to
achieve the technical objectives of the work described. The WBS is used as a management tool
throughout the life cycle of a project to identify, assign, and track its total work scope. When
initial project funding is received, the Project Director (PD) develops a WBS that identifies
necessary funds according to the schedule and needs of the tasks in the WBS elements. The
WBS is generally a multi-level framework that organizes and graphically displays elements
representing work to be accomplished in logical relationships. The PD is to structure the project
work into WBS elements (work packages) that are:

a. Definable can be described and easily understood by project participants.

b. Manageable a meaningful unit of work where specific responsibility and authority can
be assigned to a responsible individual
c. Estimate able duration can be estimated in time required to complete, and cost can be
estimated in resources required to complete.
d. Independent minimum interface with or dependence on other ongoing elements (i.e.,
e. Assignable to a single control account, and clearly distinguishable from other work
packages).
f. Integra table integrates with other project work elements and with higher level cost
g. Measurable can be used to measure progress; has start and completion dates and
measurable interim milestones
h. Adaptable sufficiently flexible so the addition/elimination of work scope can be
readily accommodated in the WBS framework.

Relationships among WBS elements and detailed descriptions of each element are presented
in the WBS dictionary accompanying the hierarchical diagram. The WBS dictionary is a key
project definition tool that defines in-depth the scope for each work element; documents
assumptions about the work, including deliverables, milestones/key performance parameters,
and quantities (if applicable); lists required resources and processes to accomplish the work;
identifies a completion schedule, including measurable milestones; and provides links to key
technical design or engineering documents.

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Table 5: Index of WBS

PART 1 INDEX (cont.)
Indenture
Level 1 2 3
X 4 5
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X

Element Title
Project Administration
Project Control
Design/Construction
Startup
Records Management
Design/Construction
Startup
Support Services
Consultants
Facilities
Management Services
Engineering
Construction Eng.
Procurement Eng.
Index. Constr. Cost Est.
Process Development
Design Support
Tech. Direction and Review
Eng. Change Management
Plant Liaison
Computer/CS Development
Tech. Support of DCS Design
DCS Purchase Support
Combined with 1.1.6.4.2
Software Configuration
Computer Security
SO Test Preparation
Administrative
Electrical and Instr.
HVAC
Miscellaneous
Process
Remote

END OF PROJECT REPORT

FPR Project
CWBS Code
1.1.5
1.1.5.1
1.1.5.1.1
1.1.5.1.2
1.1.5.2
1.1.5.2.1
1.1.5.2.2
1.1.5.3
1.1.5.3.1
1.1.5.3.2
1.1.5.3.3
1.1.5.4
1.1.5.4.1
1.1.5.4.2
1.1.5.5
1.1.6.1
1.1.6.2
1.1.6.2.1
1.1.6.2.2
1.1.6.3
1.1.6.4
1.1.6.4.1
1.1.6.4.2
1.1.6.4.3
1.1.6.4.4
1.1.6.4.5
1.1.7.1
1.1.7.1.1
1.1.7.1.2
1.1.7.1.3
1.1.7.1.4
1.1.7.1.5
1.1.7.1.6