MANAGING CS/IT PROJECTS

 What is a Project?

A project is a temporary endeavor, having a defined beginning and end (usually constrained by date, but can be by funding or deliverables),
undertaken to meet unique goals and objectives, usually to bring about beneficial change or added value. The temporary nature of projects
stands in contrast to business as usual (or operations), which are repetitive, permanent or semi-permanent functional work to produce products
or services. In practice, the management of these two systems is often found to be quite different, and as such requires the development of
distinct technical skills and the adoption of separate management.

The primary challenge of project management is to achieve all of the project goals and objectives while honoring the preconceived project
constraints. Typical constraints are scope, time, and budget. The secondary—and more ambitious—challenge is to optimize the allocation and
integration of inputs necessary to meet pre-defined objectives.

A project in other words is “a unique endeavor to produce a set of deliverables within clearly specified time, cost and quality
constraints”.
 Unique in nature
 Defined timescale
 Approved budget
 Limited resources
 Element of risk
 Achieve beneficial change

 What is Project Management?

Project management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of
specific project goals and objectives.

Managing an IT project is like juggling chunks of Jell-O: It's neither easy nor pretty. Information technology is especially slippery because it's
always moving, changing, adapting and challenging business as we know it.

“Project Management is the effective and efficient use of relevant skills, tools and applicable management processes required to
undertake a project successfully”.
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  Set of skills
 Suite of tools
 Series of processes

Project managers

A project manager is a professional in the field of project management. Project managers can have the responsibility of the planning,
execution, and closing of any project, typically relating to construction industry, engineering, architecture, computing, or telecommunications.
Many other fields in the production engineering and design engineering and heavy industrial also have project managers.

A project manager is the person accountable for accomplishing the stated project objectives. Key project management responsibilities include
creating clear and attainable project objectives, building the project requirements, and managing the triple constraint for projects, which is
cost, time, and scope.

A project manager is often a client representative and has to determine and implement the exact needs of the client, based on knowledge of
the firm they are representing. The ability to adapt to the various internal procedures of the contracting party, and to form close links with the
nominated representatives, is essential in ensuring that the key issues of cost, time, quality and above all, client satisfaction, can be realized.

 The Project Lifecycle

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 Initiation
 The initiation phase essentially involves the project „start-up‟. It is the phase within which the business problem or
opportunity is identified, the solution is agreed, a project formed to produce the solution and a project team appointed.

Developing a Business case

 A detailed definition of the problem or opportunity;
 An analysis of the potential solution options available. For each option, the potential benefits, costs, risks and issues are
documented. A formal feasibility study may be commissioned if the feasibility of any particular solution option is not
clear;
 The recommended solution and a generic implementation plan.
▪ Sample/guidelines

Perform Feasibility Study

 Purpose is to assess the likelihood of a particular solution option‟s achieving the benefits outlined in the Business Case.
 Investigate whether the forecast costs are reasonable, the solution is achievable, the risks are acceptable and/or any likely
issues are avoidable.
▪ Sample/guidelines

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Establish Project Charter
 Defines the vision, objectives, scope and deliverables for the project.
 Provides the organization structure (roles and responsibilities) and a summarized plan of the activities, resources and
funding required to undertake the project
 Any risks, issues, planning assumptions and constraints are listed.
sample
Appoint Project Team
 Although a Project Manager can be appointed at any stage of the project, s/he will need to be appointed prior to the
establishment of the project team.
 Detailed Job Description for each project role and appoints a human resource to each role based on his/her relevant skills
and experience.

Set up Project Office

 Physical environment within which the team will be based.
 Possible to have a „virtual project office‟ environment, with project team members in various locations around the world.
 comprise the following components:
 Location (either physical or virtual)
 Communications (telephones, computer network, email, internet access, file storage, database storage and backup
facilities)
 Documentation (methodology, processes, forms and registers)
 Tools (for accounting, project planning and risk modeling)

Perform Phase Review

 At the end of the Initiation Phase, a Phase review is performed. This is basically a checkpoint to ensure that the
project has achieved its stated objectives as planned.

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 PROJECT PLANNING
 By this stage, the benefits and costs of the project have been clearly documented, the objectives and scope have been
defined, the project team has been appointed and a formal project office environment established. It is now time to
undertake detailed planning to ensure that the activities performed in the execution phase of the project are properly
sequenced, resourced, executed and controlled.

Develop a Project Plan

 The first step is to document the Project Plan.
 A „Work Breakdown Structure‟ (WBS) is identified, which includes a hierarchical set of phases, activities and tasks to be
undertaken on the project.
 Assessment of the effort required to undertake the activities and tasks is made. The activities and tasks are sequenced,
resources are allocated and a detailed project schedule is formed.
 This project schedule will become the primary tool for the Project Manager to assess the progress of the project.

Develop Resource Plan

 Allocate the resources to activities and tasks within the Project Plan
 Types of resources (labor, equipment and materials) and total quantities of each resource type
 Roles, responsibilities and skill-sets of all human resources
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  Items, purposes and specifications of all equipment resource
 Items and quantities of material resource.
 A schedule is assembled for each type of resource so that the Project Manager can assess the resource allocation at
each stage in the project.

Develop Financial plan

 prepared to identify the amount of money required for each stage in the project.
 total cost of labor, equipment and materials is quantified and an expense schedule is defined which provides the Project
Manager with an understanding of the forecast spending vs. the actual spending throughout the project.

Develop Quality Plan

 Defines what quality means in terms of this project
 Lists clear and unambiguous quality targets for each deliverable. Each quality target provides a set of criteria and
standards which must be achieved to meet the expectations of the customer
 Outlines a plan of activities which will assure the customer that the quality targets will be met (i.e. a Quality Assurance
Plan)
 Identifies the techniques used to control the actual level of quality of each deliverable as it is built (i.e. a Quality Control
Plan).

Develop Risk Plan

 Documents the foreseeable project risks
 Set of actions to be taken formulated to both prevent each risk from occurring and reduce the impact of the risk should it
eventuate.
 Developing a clear Risk Plan is an important activity within the planning phase as it is necessary to mitigate all
critical project risks prior to entering the Execution phase of the project.

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Develop Acceptance Plan
 Provides the criteria for obtaining customer acceptance
 Schedule of acceptance reviews within which customer acceptance will be sought and a summary of the process used to
gain acceptance of each deliverable from the customer.
 Key to a successful project is gaining acceptance from the customer that each deliverable produced meets (or
exceeds) his/her requirements.

Develop Communications Plan

 It is also necessary to identify how each of the stakeholders will be kept informed of the progress of the project.
 The Communications Plan identifies the types of information to be distributed, the methods of distributing information to
stakeholders, the frequency of distribution and responsibilities of each person in the project team for distributing
information regularly to stakeholders.

Develop Procurement Plan

 Provides a detailed description of the Products (i.e. goods and services) to be procured from suppliers,
 Justification for procuring each product externally, as opposed to from within the business, and the schedule for
procurement.
 It also references the process for the selection of a preferred supplier (“Tender Process”) and the process for the actual
order and delivery of the procured products (“Procurement Process”).

Contract Suppliers
 Have a clear idea of the role of the supplier and the expectations for the delivery.
 A formal Tender Process is invoked.
 Statement of Work,
 Request for Information
 Request for Proposal
 Supplier Contract is agreed for the delivery of the requisite product.

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Perform Phase Review
 At the end of the Planning phase, a Phase review is performed. This is basically a checkpoint to ensure that the project has
achieved its stated objectives as planned.

Execution
 This is typically the longest phase of the project (in terms of duration).
 It is the phase within which the deliverables are physically constructed and presented to the customer/beneficiary for
acceptance.
 To ensure that the customer‟s requirements are met, the Project Manager monitors and controls the activities, resources
and expenditure required to build each deliverable throughout the execution phase.
 A number of management processes are also undertaken to ensure that the project proceeds as planned.
 Project plan is implemented
 Monitor and Control the deliverables
▪ Identify risks and issues, changes
▪ Review deliverable quality
▪ Measure against the acceptance criteria

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Build Deliverables
 This phase requires the physical construction of each deliverable for acceptance by the customer. The actual activities
undertaken to construct each deliverable will vary, depending on the type of project (e.g. engineering, building
development, computer infrastructure or business process re-engineering projects). Deliverables may be constructed in a
„waterfall‟ fashion (where each activity is undertaken in sequence until the deliverable is finished) or an „iterative‟ fashion
(where iterations of each deliverable are constructed until the deliverable meets the requirements of the customer).

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 Regardless of the method used to construct each deliverable, careful monitoring and control processes should be
employed to ensure that the quality of the final deliverable meets the acceptance criteria set by the customer.

Monitor and Control

 Whilst the Project Team is physically producing each deliverable, the Project Manager implements a series of
management processes to monitor and control the activities being undertaken. An overview of each management process
follows.

Time Management
 Time Management is the process within which time spent by staff undertaking project tasks is recorded against the
project. As time is a scarce resource on projects, it is important to record the time spent by each member of the team on a
Timesheet to enable the Project Manager to control the level of resource allocated to a particular activity. A Timesheet
Register provides a summary of the time currently spent on the project and enables the Project Plan to be kept fully up to
date.

Cost Management
 Cost Management is the process by which costs (or expenses) incurred on the project are formally identified, approved
and paid. Expense Forms are completed for each set of related project expenses such as labor, equipment and materials
costs. Expense Forms are approved by the Project Manager and recorded within an Expense Register for audit purposes

Quality Management
 Quality is defined as “the level of conformance of the final deliverable to the customer‟s requirements”. Quality
Management is the process by which the quality of the deliverables is assured and controlled for the project, using
Quality Assurance and Quality Control techniques. Quality reviews are frequently undertaken and the results recorded
within a Quality Register.

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Change Management
 Change Management is the process by which changes to the project‟s scope, deliverables, timescales or resources are
formally defined, evaluated and approved prior to implementation. A core aspect of the Project Manager‟s role is to
manage change within the project successfully. This is achieved by understanding the business and system drivers
requiring the change, documenting the benefits and costs of adopting the change and formulating a structured plan for
implementing the change. To formally request a change it is often necessary to complete a Change

Risk Management
 Risk Management is the process by which risks to the project (e.g. to the scope, deliverables, timescales or resources) are
formally identified, quantified and managed during the project. A project risk may be identified at any stage of the project
by completing a Risk Form and recording the relevant risk details within the Risk Register.

Issue Management
 Issue Management is the method by which issues currently affecting the ability of the project to produce the required
deliverable are formally managed. After completion of an Issue Form (and logging the details within the Issue Register),
each issue is evaluated by the Project Manager and a set of actions undertaken to resolve the issue at hand.

Procurement Management
 Procurement Management is the process by which product is sourced from an external supplier. To request the delivery
of product from a supplier, a Purchase Order must be approved by the Project Manager and sent to the supplier for
confirmation. The status of the purchase is then tracked using a Procurement Register until the product has been
delivered and accepted by the project team.

Acceptance Management
 Acceptance Management is the process by which deliverables produced by the project are reviewed and accepted by the
customer as meeting his/her specific requirements. To request the acceptance of a deliverable by the customer, an

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 Acceptance Form is completed. The Acceptance Form describes the criteria from which the deliverable has been produced
and the level of satisfaction of each criterion listed.

Communications Management
 Communications Management is the process by which formal communications messages are identified, created, reviewed
and communicated within a project. The most common method of communicating the status of the project is via a Project
Status Report. Each communication item released to the project stakeholders is captured within a Communications
Register.

Project Closure
 Following the completion of all project deliverables and acceptance by the customer, a successful project will have met its
objectives and be ready for formal closure. Project Closure is the last phase in the project and must be conducted formally
so that the business benefits delivered by the project are fully realized by the customer.

Perform Project Closure

 Project Closure involves undertaking a series of activities to wind up the project, including:
 Assessing whether the project completion criteria have been met
 Identifying any outstanding items (activities, risks or issues)
 Producing a hand-over plan to transfer the deliverables to the customer environment
 Listing the activities required to hand over documentation, cancel supplier contracts and release project resources to the
business
 Communicating closure to all stakeholders and interested parties.
 A Project Closure Report is submitted to the Customer and/or Project Sponsor for approval.

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  The Project Manager is then responsible for undertaking each of the activities identified within the Project Closure Report
on time and according to budget. The project is closed only when all activities identified in the Project Closure Report
have been completed.

Review Project Completion

 The final activity undertaken on any project is a review of its overall success by an independent resource. Success is
determined by how well it performed against the defined objectives and conformed to the management processes
outlined in the planning phase. To determine performance, a number of questions are posed.
 Review Project Completion
 Did it result in the benefits defined in the Business Case?
 Did it achieve the objectives outlined in the Project Charter?
 Did it operate within the scope of the Project Charter?
 Did the deliverables meet the criteria defined in the Quality Plan?
 Was it delivered within the schedule outlined in the Project Plan?
 Was it delivered within the budget outlined in the Financial Plan?
 Review Project Completion
 To determine conformance, a review is undertaken of the level of conformity of the project activities to the management
processes outlined in the Quality Plan. The above results, key achievements and lessons learnt are documented within a
Post Implementation Review report and presented to the Project Sponsor for approval.

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PROJECT INITIATION:

Projects are initiated from the recognition that:

(a) There is a problem (or a specific need) to be addressed, and
(b) That this problem can be addressed through a project to implement some solution.

Problem needs must be quantified (eventually, in terms of requirements for IT projects) for a project to be formally initiated. The
general process of refining “needs” into a problem statement is shown in Figure 3.3. The party that recognizes the problem, the
party that articulates the problem, the party that proposes the problem solution, and the party that performs the project may be
different parties, either individually or organizationally. Project proposals are developed in the organization(s) in response to
requests from managers (top down), from workers (bottom up), and from customers or other stakeholders (external). Proposals
are generally reviewed by line management (which may request a detailed business plan), and if approved result in a project
charter, which is the official go-ahead document. Project management (when selected and empowered) generally develops a
scope statement, which eventually leads to functional requirements (what the proposed system will do), interface requirements,
and technical requirements (how it will work). The problems and needs that are identified, and then articulated, are inherently
fuzzy due to several common circumstances.

Project Definition & Proposal:

I. Gathering Project Information:

a. Establishing the Project Requirements

i. Does the Project Have an Exact Result?

ii. Are There Industry or Government Sanctions to Consider?

iii. Does the Project Have a Reasonable Deadline?

iv. Is the Project Sponsor Someone Who Has the Authority to Christen the Project?

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 v. Does the Project Have a Financial Commitment?

vi. Is Someone Else Doing This Already?

b. Possessing Multiple Personas:

i. How Will This New Technology Affect Your Users?

ii. Will This Technology Have an Impact on Any Other Software?

iii. Will This Technology Work with Any Operating System?

iv. What Other Companies Are Using This Technology?

v. Does the Vendor of This Technology Have a Good Track Record in the Industry?

vi. What Is the Status of Your Network Now?

vii. What If…Analysis?

c. Interviewing Management

i. Get to know their project vision, objectives

ii. Be on a fact-finding mission

d. Interviewing the Stakeholders

i. Management

ii. The project manager

iii. The project team

iv. Project sponsors

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 v. Customers

vi. End users

vii. The community

II. Feasibility Study:

a. Technical Feasibility (Can we build it?)

b. Operational Feasibility (Can we maintain it?)

c. Economic Feasibility (Can we make money on it?)

d. Others Could be:

i. Schedule feasibility

ii. Legal feasibility

iii. Political feasibility

Project Selection
There are many numerical techniques used to evaluate the net benefit of a project. Most of these are financial in nature and rely
on future estimates of revenues and costs.

There are several ways of selecting a project:

1. Financial Project Selection Methods
2. Project Murder Boards
3. Project Scoring Methods
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 4. Constrained optimization methods
5. Expert Judgment

1. Financial Selection Methods

The financial project selection methods rely on the initial cost of the project (cash outflows) and estimated future incomes in the
form of cash inflows. The project that has higher positive income will be selected.

• Payback Period
• Net Present Value (NPV)
• Benefit-Cost Ratio (BCR)
• Internal Rate of Return (IRR)
• Decision Tree Analysis (DTA)

Payback Period

Payback period in capital budgeting refers to the period of time required for the return on an investment to "repay" the sum of the original
investment. For example, a $1000 investment which returned $500 per year would have a two year payback period. The time value of money
is not taken into account. Payback period intuitively measures how long something takes to "pay for itself." All else being equal, shorter
payback periods are preferable to longer payback periods. Payback period is widely used because of its ease of use despite the recognized
limitations described below.

The term is also widely used in other types of investment areas, often with respect to energy efficiency technologies, maintenance, upgrades,
or other changes. For example, a compact fluorescent light bulb may be described as having a payback period of a certain number of years or
operating hours, assuming certain costs. Here, the return to the investment consists of reduced operating costs. Although primarily a financial
term, the concept of a payback period is occasionally extended to other uses, such as energy payback period (the period of time over which
the energy savings of a project equal the amount of energy expended since project inception); these other terms may not be standardized or
widely used.

Payback period as a tool of analysis is often used because it is easy to apply and easy to understand for most individuals, regardless of
academic training or field of endeavour. When used carefully or to compare similar investments, it can be quite useful. As a stand-alone tool
to compare an investment to "doing nothing," payback period has no explicit criteria for decision-making (except, perhaps, that the payback
period should be less than infinity).
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The payback period is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for
the time value of money, risk, financing or other important considerations, such as the opportunity cost. Whilst the time value of money can
be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be
used in isolation. Alternative measures of "return" preferred by economists are net present value and internal rate of return. An implicit
assumption in the use of payback period is that returns to the investment continue after the payback period. Payback period does not specify
any required comparison to other investments or even to not making an investment.

Payback period is usually expressed in years. Start by calculating Net Cash Flow for each year: Net Cash Flow Year 1 = Cash Inflow Year 1 -
Cash Outflow Year 1. Then Cumulative Cash Flow = (Net Cash Flow Year 1 + Net Cash Flow Year 2 + Net Cash Flow Year 3 ... etc.)
Accumulate by year until Cumulative Cash Flow is a positive number: that year is the payback year.

To calculate a more exact payback period: Payback Period = Payback Year - 1 + (Unrecovered starting costs*/Net Cash Flow during Payback
Year)

(*)This is the absolute value of the Net Cash Flow the year before the Payback Year; i.e. the remaining outflows left to recover at the
beginning of the Payback Year.

Additional complexity arises when the cash flow changes sign several times; i.e., it contains outflows in the midst or at the end of the project
lifetime. The modified payback period algorithm may be applied then. First, the sum of all of the cash outflows is calculated. Then the
cumulative positive cash flows are determined for each period. The modified payback period is calculated as the moment in which the
cumulative positive cash flow exceeds the total cash outflow.

There are two ways:

• When Annual Cash Inflows are Equal

• When Annual Cash Inflows are NOT Equal

1. When Annual Cash Inflows are Equal

Cost of the Project C

Payback Period   0
Annual Cash Inflows CFA

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ACCEPT-REJECT CRITERIA;

 While comparing two projects, a project with lesser payback period will be selected.
 If the payback period calculated for a project is less than the maximum payback period set by the management, then it
would be accepted, otherwise not.
Question 1: An SMS software project costs GH¢ 50,000 and the initial agreement with a company is 5 years. The annual cash
inflows is GH¢ 12,500. Calculate the payback period.

Solution:

Cost of the Project C

Payback Period   0
Annual Cash Inflows CFA

50,000
Payback Period   4 Years
12,500

2. When Annual Cash Inflows are NOT Equal

Question 2: A computer maintenance project costs GH¢ 20,000, the life of the project (technical support period) is 4 years and the
cash inflows are as follows: GH¢ 8,000, 7,000, 4,000, 3,000. Calculate the payback period.

Solution:

In order to recover the original cost of the project of GH¢ 20,000,

8,000
7,000 8,000+ 7,000+ 4,000 = 19,000
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4,000

3,000

By adding the three years we get GH¢ 19,000 and GH¢ 1,000 is remaining to obtain the original cost of the project of GH¢ 20,000.
Now, assuming the last GH¢ 3,000 is equally distributed over the 12 months, then

3000 = 12 (Months)

Solving:

3000  12
1000  x
 3,000 x  12,000
12,000
x  4 Months
3000

Therefore GH¢ 1,000 can be obtained in 4 months.

Payback period = 3 years and 4 months.

Question 3: You are the IT Project Manager of a company and you have been provided with 3 projects to select the best project
that the company will undertake. The details of the projects are given below:

Project-I Project-II Project-III

Cash outflows -20,000 -20,000 -20,000

Years: GH¢ GH¢ GH¢

1. 4,000 9,000 8,000

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 2. 7,000 7,000 6,000
3. 5,000 4,000 4,000
4. 4,000 ----- 1,000
5. 3,000 ----- 1,000
6. ----- ----- 2,000

Calculate the payback period and select the project to be taken up by the company.

Solution:
Project-I Project-II Project-III
Cash outflows -20,000 -20,000 -20,000
Year: Cumulative CF GH¢ Cumulative CF GH¢ Cumulative CF
1. 4,000 4,000 9,000 9,000 8,000 8,000
2. 7,000 11,000 7,000 16,000 6,000 14,000
3. 5,000 16,000 4,000 20,000 4,000 18,000
4. 4,000 20,000 ----- ----- 1,000 19,000
5. 3,000 23,000 ----- ----- 1,000 20,000
6. ----- ----- ----- ----- 2,000 22,000

Payback periods for the 3 projects are given below:

Project-I: 4 Years
Project-II: 3 Years
Project-III: 5 Years

Therefore, Project-II should be selected because it has the minimum payback period.

Advantages of Payback period:

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 1. It is simple and easy to understand.
2. It takes into consideration the risk of the project, because it is concerned with the payback period (Shorter the period,
lesser the risk).
3. Payback puts emphasis on the liquidity of the project
4. It is a good indicator of how quickly the original cost of the project is going to be recovered.

Disadvantages of Payback period:

1. This method does not take into account the total returns from a project, it ignores cash inflows beyond the payback
period. This leads to discrimination against projects which generates substantial cash flows in the later years.
2. The method indicates merely the recovery period of the amount spend on the project.
3. This method ignores the time value of money.

I. NET PRESENT VALUE (NPV)

In finance, the net present value (NPV) or net present worth (NPW) of a time series of cash flows, both incoming and outgoing, is defined
as the sum of the present values (PVs) of the individual cash flows of the same entity.

In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase
price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash
flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting,
and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once
financing charges are met.

The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse
process in DCF analysis - taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which
would yield the given price as NPV) - is called the yield, and is more widely used in bond trading.

This is a time adjusted or discounted cash flow technique which recognizes the time value of money.
The Net Present Value of a project may be defined as follows:

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NPV= Present Values of Cash Inflows - Present Values of Cash outflows

Or
 CF1 CF2 CF3 CFn 
NPV      ........    C0
 (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3

When salvage value exists:

 CF1 CF2 CF3 CFn S 

NPV      ........     C0
 (1  k ) (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3 n

Or

n
CFt
NPV    C0
t 1 (1  k ) t

Where:
At  Annual Cash Inflows at time t
C 0  Initial Project Cost
k  Discount Rate or Cost of Capital

1. WHEN ANNUAL CASH INFLOWS ARE NOT EQUAL:

Question 4: A software maintenance agreement costs GH¢ 2,500 and the agreement period is 5 years. The annual cash flows are:
GH¢ 900, 800, 700, 600, 500, k=10%. Find the NPV of the project.

Solution:

C0  2,500 , n  5 , k  10%  0.1

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  CF1 CF2 CF3 CFn 
NPV      ........    C0
 (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3

 900 800 700 600 500 

NPV   1
 2
 3
 4
   2,500
 (1.1) (1.1) (1.1) (1.1) (1.1) 5 

 900 800 700 600 500 

NPV        2,500
 1.1 1.21 1.331 1.4641 1.61051
NPV  2,725  2,500  225  0

Alternatively:

Year CF PVF(10%,5) PV
1. 900 0.909 818
2. 800 0.826 661
3. 700 0.751 526
4. 600 0.683 410
5. 500 0.621 310
PV of Cash Inflows 2,725

n
CFt
NPV    C0
t 1 (1  k ) t

Or
NPV= Present Value of Cash Inflows - C 0

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NPV  2,725 - 2,500  225
Since the NPV is positive, the project may be accepted.

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Question 5: A network installation project costs GH¢ 1,000,000 and maintenance agreement period is 5 years. The annual cash
flows are: GH¢ 200,000, 200,000, 300,000, 300,000, 350,000, k=10%. Find the NPV of the project.

Solution:

C 0  1,000 ,000 , n  5 , k  10%  0.1

 CF1 CF2 CF3 CFn 

NPV      ........    C0
 (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3

 200,000 200,000 300,000 300,000 350,000 

NPV   1
      1,000,000
 (1.1) (1.1) 2 (1.1) 3 (1.1) 4 (1.1) 5 

 200,000 200,000 300,000 300,000 350,000 

NPV        1,000,000
 1.1 1.21 1.331 1.4641 1.61051 
NPV  994,719  1,000,000  5,281  0
Therefore, the project should be rejected since it has negative NPV. i.e. NPV<0.

Question 6: You are the IT Project Manager of a company and there are two projects being considered for selection. Project-I:
Developing a website is being considered against Project-II: Developing a Library software. The initial project costs and other
details are given below:

Project-I: C0  20,000 , n  5 , CF: 5,000, 10,000, 10,000, 3,000, 2,000, Salvage Value=1,000, k  10%

Project-II: C0  30,000 , n  5 , CF: 20,000, 10,000, 5,000, 3,000, 2,000, Salvage Value=2,000, k  10%

Using the NPV, which project should be selected and why?

26
Solution:

 CF1 CF2 CF3 CFn S 

NPV      ........     C0
 (1  k ) (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3 n

Since there is salvage value:

Year PVF(10%,n) Project-I: CF Project-II: CF Project-I: PV Project-II: PV
1. 0.909 5,000 20,000 4,545 18,180
2. 0.826 10,000 10,000 8,260 8,260
3. 0.751 10,000 5,000 7,510 3,755
4. 0.683 3,000 3,000 2,049 2,049
5. 0.621 2,000 2,000 1,242 1,242
5. 0.621 1,000 2,000 621 1,242
PV of Cash Inflows: 24,227 34,728

NPVI  24,227  20,000  4,227

NPVII  34,728  30,000  4,728
Since Project-II has higher NPV than Project-I, therefore, Project-II should be accepted.

2. WHEN ANNUAL CASH INFLOWS ARE EQUAL:

In this case, it is quite easy to calculate the NPV.

NPV  CFA  PVAF ( k ,n )  C 0

27
Where:
NPV  Net Present Value
CFA  Annual Cash Inflows
PVAF ( k ,n )  Present Value Annuity Factor

k  Discount Rate or Cost of Capital

n  Number of Years
C0  Initial Cost of the Project

PV  CFA  PVAF ( k ,n )

Question: A mobile application is to be developed for a company. The cost of developing the application is GH¢ 50,000 and the
developer is to provide technical support for the first 5 years. The estimated cash inflow is GH¢ 12,500 per year and the cost of
capital is 10%. Calculate the NPV.

Solution:

Co  50,000 , CFA  12,500 , n  5 , k  10% ,

PV  CF A  PVAF ( k ,n )
NPV  CFA  PVAF ( k ,n )  C 0

PVAF (10,5)  3.791

NPV  12,500  3.791  50,000  47,387.5  50,000  2,612.5

Since NPV  0 , then the project should be rejected and not to be undertaken.

28
Advantages of NPV:

 It takes into consideration the time value of money. As a result of this, possible risk and uncertainty of a project are duly
recognized.
 It considers all cash flows over the entire life of the project.
 The NPV of various projects, measured as they are in today‟s cedis, can be added, e.g. NPV ( A  B)  NPV ( A)  NPV ( B) .
This is called Value-Additivity

Disadvantages of NPV:

 It assumes that the discount rate which is usually the cost of capital (k ) is known. But the cost of capital in most cases is
difficult to calculate.
 It may not give satisfactory answer when projects involving different amounts of original cost are compared. A project
with higher NPV may not be desirable if it also requires a large amount of original cost.

BENEFIT- COST RATIO (BCR):

A benefit-cost ratio (BCR) is an indicator, used in the formal discipline of cost-benefit analysis, that attempts to summarize the overall value
for money of a project or proposal. A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its
costs, also expressed in monetary terms. All benefits and costs should be expressed in discounted present values.

Benefit cost ratio (BCR) takes into account the amount of monetary gain realized by performing a project versus the amount it costs to
execute the project. The higher the BCR the better the investment. General rule of thumb is that if the benefit is higher than the cost the
project is a good investment.

The Benefit-Cost Ratio can be defined as follows:

Present Value of Cash Inflows

BCR 
Cost of the Project
29
Or

CF1 CF2 CF3 CFn Sn

   .....  
(1  k ) (1  k )
1 2
(1  k ) 3
(1  k ) n
(1  k ) n
BCR 
C0
Or
n
CFt Sn
 (1  k )
t 1
t

(1  k ) n
BCR 
C0
Another way of defining BCR is by using the Net Benefit-Cost Ratio (NBCR) as follows:

NPV
NBCR 
C0
ACCEPT-REJECT CRITERIA:

WHEN BCR OR NBCR RULE IS

1 0 Accept the Project
1 0 Indifferent on the Project
1 0 Reject the Project

Advantages of BCR:

1. Like NPV & IRR, it gives due consideration to the time value of money
2. It considers all the cash flows over the entire life of the project.
3. Since the present value of cash inflows is divided by the original cost of capital, it is a relative measure of a project‟s
profitability. Due to this, it is considered a better method for project evaluation. Though it is based on NPV, it is a better
evaluation technique than NPV in a situation of capital rationing. For example, two projects may have the same NPV of
10,000 but Project A requires an initial cost of 50,000 whereas Project B requires only 25,000. According to BCR, Project B

30
 will be preferred. Though, NPV will give identical ranking to both. In this case, BCR is superior than NPV. But for
mutually exclusive projects, NPV is better.

II. INTERNAL RATE OF RETURN (IRR)

The internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is
also called the discounted cash flow rate of return (DCFROR) or the rate of return (ROR).[1] In the context of savings and loans the IRR is
also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g.,
the interest rate or inflation). The internal rate of return on an investment or project is the "annualized effective compounded return rate" or
"rate of return" that makes the net present value (NPV as NET*1/(1+IRR)^year) of all cash flows (both positive and negative) from a
particular investment equal to zero.

In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the
investment equals the net present value of the benefits (positive cash flows) of the investment.

Internal rates of return are commonly used to evaluate the desirability of investments or projects. The higher a project's internal rate of return,
the more desirable it is to undertake the project. Assuming all projects require the same amount of up-front investment, the project with the
highest IRR would be considered the best and undertaken first.

A firm (or individual) should, in theory, undertake all projects or investments available with IRRs that exceed the cost of capital. Investment
may be limited by availability of funds to the firm and/or by the firm's capacity or ability to manage numerous projects.

Uses
Because the internal rate of return is a rate quantity, it is an indicator of the efficiency, quality, or yield of an investment. This is in contrast
with the net present value, which is an indicator of the value or magnitude of an investment.

An investment is considered acceptable if its internal rate of return is greater than an established minimum acceptable rate of return or cost of
capital. In a scenario where an investment is considered by a firm that has equity holders, this minimum rate is the cost of capital of the
investment (which may be determined by the risk-adjusted cost of capital of alternative investments). This ensures that the investment is
supported by equity holders since, in general, an investment whose IRR exceeds its cost of capital adds value for the company (i.e., it is
economically profitable).

31
In the NPV calculation, we assume that the discount rate or cost of capital (k) is known and we are required to determine the
NPV of the project.
In the IRR calculation, we are not given the discount rate and we are to set NPV=0 and determine the discount rate (r i.e. IRR)
which satisfies the condition NPV=0.
Therefore, the IRR of a project is the discount rate which makes NPV=0 as shown below:

 CF1 CF2 CF3 CFn 

NPV      ........    C0
 (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3

In IRR framework:

 CF1 CF2 CF3 CFn 

0    ........  n 
 C0
 (1  k ) 1
(1  k ) 2
(1  k ) 3
(1  k ) 

 CF1 CF2 CF3 CFn 

    ........  n 
 C0
 (1  k ) 1
(1  k ) 2
(1  k ) 3
(1  k ) 

n
CFt
 (1  k )
t 1
t
 C0

The above expression shows that, the IRR is the rate that equates the present value of the cash inflows with the present value
of the cash outflows of the project.

32
Accept-Reject Criteria:

1. Accept if r  k
2. Reject if r  k
3. May Accept if r  k

I. WHEN CASH FLOWS ARE NOT EQUAL

Question: Supply of laptops to a customer and maintenance agreement of three years costs GH¢ 16,000. The annual cash
flows are: 8,000, 7,000 and 6,000. If k  14% , what is the IRR ( r ).

Solution:

n  3 , k  14% , C0  16,000

 CF1 CF2 CF3 CFn 

    ........    C0
 (1  k ) (1  k ) (1  k ) (1  k ) n 
1 2 3

 8,000 7,000 6,000 

     16,000
 (1  r ) (1  r ) (1  r ) 3 
1 2

We need the value of r that satisfies the above equation. But the calculation of r consists of several steps using the Trial &
Error Method. We try different values of r till we find the LHS to equal the RHS, which is 16,000.

Short-cut Approach:

In order to reduce the number of trial values, the short-cut approach is given below:

8,000  7,000  6,000

1. Find the average of expected annual cash flows: CF   7,000
3

33
 C0 16,000
2. Divide the cost of the project C0  16,000 this average:   2.2857
CF 7,000
3. Consult the Present Value Annuity Table and find the discount rate that will make the present
value annuity of one GH¢ (for a period equal to the life of the project, n  3 ) given in step 2. For the above
project, at n  3 locate the value 2.2857. This value lies between 15% and 16%. Therefore, the first trial value will be
16%.

At r  16%  0.16 the equation becomes:

 8,000 7,000 6,000 

 1
 2
   16,000
 (1.16) (1.16) (1.16) 3 

=6896.55+5202.14+3843.96=15,942 <16,000

Therefore, at k  16%  0.16 the present value =15,942.

This value was less indicating that the denominator was large.

Try at k  15%  0.15

 8,000 7,000 6,000 

 1
 2
 
 (1.15) (1.15) (1.15) 3 
=6956.52+5293+3945=16,194.52 >16,000.

Therefore, IRR value lies between 15% and 16%.

Now applying linear interpolation in order to find the correct value of r, we use the following procedure:

C0  16,000
PV at Lower rate ( PVCFL )-15% = 16,194
PV at Higher rate ( PVCFH )-16% = 15,942
34
  C  PVCFL 
IRR  r  rL   0   k
 PV 
 16,000  16,194 
IRR  r  15%    16%  15%
 16,194  15,942 
  194 
r  15%    1%
 252 
 194 
r  15%     15.77%
 252 
r  15.77%

II. WHEN CASH FLOWS ARE EQUAL

Question:

A campus wireless installation project costs GH¢ 36,000 and is expected to generate cash inflows of 11,200 annually for five
years. Calculate the IRR.

Solution:

C0  36,000 , CFA  11,200 , n  5

Now from the present value annuity table, this value lies between 3.274 & 3.199 which correspond to 16% and 17%. Therefore,
the actual value of IRR lies between 16% and 17%. This can be calculated using the method of linear interpolation as follows:

PV at Lower rate = PVCF(16%)  11,200  3.274  36,668.8

PV at Higher rate = PVCF(17%)  11,200  3.199  35,828.8

35
  C  PVCFL 
IRR  r  rL   0   r
 PV 
 36,000  36,668.8 
IRR  r  16%     1%
 36,668.8  35,828.8 
  668.8 
r  16%     1%
 840 
r  16%  0.8  16.8%
r  16.8%

Alternatively,

C0  36,000 , CFA  11,200 , n  5

C0 36,000
Payback Period  PVAF    3.214
CFA 11,200

Where:

PVAF  Present Value Annuity Factor

C0  Original Cost of the project
CFA  Annual Cash Inflows

Now from the present value annuity table, this value lies between 3.274 & 3.199 which correspond to 16% and 17%. Therefore,
the actual value of IRR lies between 16% and 17%. This can be calculated using the method of linear interpolation as follows:

From the above explanation:

Pbp  PVAF  3.214

DFk L  3.274 , DFk H  3.199
DFk L  Discount Factor of Lower Rate of Cost of Capital

36
DFk H  Discount Factor of Higher Rate of Cost of Capital

 PVAF  DFk L 
IRR  k L     k
 DFk  DFk 
 L H 

 PVAF  DFk L 
IRR  k L     k

 DF 

 3.214  3.274 
IRR  16%     1%
 3.274  3.199 
  0.06 
r  16%     1%
 0.075 
r  16%  0.8  16.8%
r  16.8%

Advantages of IRR:

1. Like NPV method, it takes into consideration the time value of money.
2. It considers all cash flows over the entire life of the project

Disadvantages of IRR:

1. It is rather difficult to understand and to apply

2. It may give misleading & inconsistent results especially when the NPV of a project does not decline with discount rates or
if the projects differ in their expected lives or cash outlays being different or timing of cash flows
3. It may not give unique rates in all situations, i.e. multiples rates can be obtained
4. The principle of value additivity does not apply to IRR techniques as in the case of NPV approach.

37
 III. DECISION TREE ANALYSIS (DTA):
A decision tree is a decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance
event outcomes, resource costs, and utility. It is one way to display an algorithm. Decision trees are commonly used in operations research,
specifically in decision analysis, to help identify a strategy most likely to reach a goal. If in practice decisions have to be taken online with no
recall under incomplete knowledge, a decision tree should be paralleled by a Probability model as a best choice model or online selection
model algorithm. Another use of decision trees is as a descriptive means for calculating conditional probabilities.

Decision trees are graphical representations of alternative choices that can be made by a project manager, which enable the
decision maker to identify the most suitable option in a particular situation. Decision trees analysis tools can help in making
complex decisions. The computational process includes the calculation of the Expected Values or Expected Monetary Values
(EMV). Decision trees are a helpful visual tool when it is possible to measure the probabilities of an event occurring and the
likely financial outcomes of making a particular decision.

In decision tree analysis, a problem is depicted as a diagram which displays all possible acts, events, and payoffs (outcomes)
needed to make choices at different points over a period of time. The development of a decision tree is a multi step process.

Steps to Use Decision Trees Analysis

To use Decision Tree Analysis in Project Risk Management, you need to:

1. Document a decision in a decision tree.

2. Assign a probability of occurrence for the risk pertaining to that decision.

3. Assign monetary value of the impact of the risk when it occurs.

4. Compute the Expected Monetary Value for each decision path.

Therefore, you start a Decision Tree with a decision that you need to make. Draw a small square to represent this on the left
hand side of a large piece of paper, half way down the page.
38
From this box draw out lines towards the right for each possible solution, and write a short description of the solution along the
line. Keep the lines apart as far as possible so that you can expand your diagram.

At the end of each line, consider the results. If the result of taking that decision is uncertain, draw a small circle. If the result is
another decision that you need to make, draw another square. Squares represent decisions, and circles represent uncertain
outcomes. Write the decision or factor above the square or circle. If you have completed the solution at the end of the line, just
leave it blank.

Starting from the new decision squares on your diagram, draw out lines representing the options that you could select. From the
circles draw lines representing possible outcomes. Again make a brief note on the line saying what it means. Keep on doing this
until you have drawn out as many of the possible outcomes and decisions as you can see leading on from the original decisions.

The following are the symbols commonly used in decision tree analysis:

Decision Tree Analysis Tools:

Example:

Your company has been presented with a new proposal to develop a new school management system. The cost of the project
development is $500,000. The probability of successful development is projected to be 70%. If the development is unsuccessful,
the project will be terminated. If it is successful, the developer must then decide whether to begin developing a completely new
school management system or modify an existing school management system. If the demand for the new school management
system is high, the incremental revenue for the school management system is $1,200,000, and the incremental revenue for the
modified school management system is $850,000. If the demand is low, the incremental revenue for the new school management
system is $700,000, and the incremental revenue for the modified school management system is $720,000. All of these
39
incremental revenue values are gross figures, i.e., before subtracting the $500,000 development cost, $300,000 for the new school
management system and $100,000 for the modified school management system. The probability of high demand is estimated as
40%, and of low demand as 60%.

Solution:

The first step is to structure the problem using a method called decomposition, similar to the method used in the development
of a work breakdown structure. This step enables the decision-maker to break a complex problem down into a series of simpler,
more individually manageable problems, graphically displayed in a type of flow diagram called a decision tree.

40
The second step requires the assessment of the payoff values to be developed for each end-position on the decision tree. These
values will be in terms of the net gain or loss for each unique branch of the diagram. The net gain/loss will be revenue less
expenditure. If the decision to not develop is made, the payoff is $0. If the school management system development is
unsuccessful, the payoff is - $500,000. If the development is successful, the decision is to develop a new school management
system or modify an existing school management system. The payoff for the new school management system with high demand
is ($ 1,200,000 - $500,000 development cost -$300,000 build cost) or $400,000. For a low demand, the payoff is ($700,000 -
$500,000 development cost -$300,000 build cost) or -$100,000. The payoff for the modified school management system with high
demand is ($850,000 -$500,000 development cost - $100,000 build cost) or $250,000. For a low demand, the payoff is ($720,000-
$500,000 development cost - $100,000 build cost) or $120,000.

41
The third step is to assess the probability of occurrence for each outcome:

42
The fourth step is referred to as the roll-back and it involves calculating expected monetary values (EMV) for each alternative
course of action payoff. The calculation is (probability X payoff) = EMV This is accomplished by working from the end points
(right hand side) of the decision tree and folding it back towards the start (left hand side) choosing at each decision point the
course of action with the highest expected monetary value (EMV).

43
Question:

A company has GH¢100 million available in cash. It can invest the money in a bank at 10% yielding a return of GH¢ 150 million
over five years (ignore compound interest). Alternatively it can invest in a project for some clients, of which there are currently
two available projects. If it invests in Project A there is a 0.5 chance of the project being a success yielding GH¢ 200 million, and a
0.5 chance of the project failing leading to a loss of GH¢ 50 million.(over the five year period) If it invests in Project B there is a
0.6 chance of the project being a success yielding GH¢ 300 million and a 0.4 chance of the project failing leading to a loss of GH¢
20 million. (over the five year period). Advise your company on the project that should be selected.

Solution:

This evaluation approach is based on probability and probability is the likelihood of an event occurring, measured by the ratio of
favorable cases to the total number of cases possible. The information given in the question can be illustrated with the help of a
decision tree. As stated earlier, in a decision tree, points at which decisions are made are represented by squares (decision forks),
and points where chance/probability comes into play are represented by circles. We set out the tree initially by working from
left to right, the decision fork is to invest, or go for Project A or B. There are then chance forks where probabilities are involved.
When we have set out the tree we can prune it back by cutting off the branches which yield the worst results and identify the
ones with the greatest benefits. This is shown by the diagram below:

44
Invest in bank: 1.0 150  150 M
n
E ( X )   X i .  P( X i )
i 1
Project A: 0.5  200  0.5  50  75 M

Project B: 0.6  300  0.4  20  172 M

It can be observed that, Project B yields the better result. This leaves us with the final expected monetary value of GH¢ 172
million which we put in the box at the start of the diagram as shown below:

Question:

A software company wants to sell its software for outright sale with licensing rights. The company is faced with the decision of
whether to sell the software now, or wait for a year in the hope that the value of the software may appreciate to a higher level. If
it sells the software now the company will receive GH¢ 250,000. However, if it sells in one year there are two possibilities:

45
1. There is a slump in the software market, so that the software can only be sold for GH¢ 200,000. There is a nine out of ten
chance that this will happen.

2. There is a boom in the software market, so that the software can be sold for GH¢ 800,000. There is a one out of ten chance that
this will happen.

You are required to advice the company on the best cause of action. Should the company wait or sell now?

Solution:

We can use decision tree analysis to identify the 'best' course of action.

1. Sell now: CF = GH¢ 250,000.

9 1
2. Sell in a year:  200,000   800,000   260,000
10 10

You can see that the preferred option is to sell in a year‟s time, because the outcome is higher GH¢ 260,000 than to sell now GH¢
250,000.

46
The mathematics for selling in one years' time is easy. We multiply the expected outcome by the probability of that outcome
happening. Although there is only a one in ten chance of a software boom it is worth taking the risk.
However, it is important to remember that some decision makers are more prepared to take a risk than others. In the example
given many decision makers will take the cautious line and with the 9 out of 10 chance of the software slump, decide to sell now.

Question:

Your company has won a contract to install a network on a campus for internet connectivity. In this project, your company is to
choose from the available technologies for installation and these are cable connection or wireless connection. If wireless
connection is selected, then a decision has to be made whether to use 2.4 GHz frequency or 5.8 GHz frequency. However, if cable
connection is selected, then a decision has to be made whether to use CAT 5 or CAT 6 cables. In the wireless connection, if 2.4
GHz frequency is selected, then out of 1.00, the possibility of getting a good signal is 0.4, a moderate signal is 0.4 and a poor
signal is 0.2. However, if 5.8 GHz frequency is selected, then out of 1.00, the possibility of getting a good signal is 0.1, a moderate
signal is 0.2 and a poor signal is 0.7. The expected earnings per year for a good signal is GH¢ 1,000,000, moderate signal is GH¢
50,000 and for a poor signal is GH¢ 2,000. If cable connection and CAT 6 cable is selected then, the possibility of getting a good
and fast link is 0.3, a moderate link is 0.3 and a poor link is 0.4. The expected annual earnings for a good link is GH¢ 400,000, for
a moderate link is GH¢ 20,000 and for a poor link is GH¢ 6,000. However, if CAT 5 cable is selected then, the possibility of
getting a good link is 0.3, a moderate link is 0.3 and a poor link is 0.4. The expected annual earnings for a good link is GH¢
20,000, and for a poor link is GH¢ 2,000.

Give your recommendations on the best technology to be used by the company to maximize expected earnings.

Solution:

47
Therefore, a wireless connection will be a better option and that too with a 2.4 GHz frequency.

2. Project Murder Boards

Murder boards are committees full of experts that ask every conceivable negative question about the proposed project. Their
goal is to expose strengths and weakness of the project-and kill the project if it's deemed worthless for the organization to
commit to. Not a pleasant decision-making process.
48
 3. Project Scoring Methods:
The aforementioned financial evaluation methods rely on future estimates of revenues and costs, either including uncertainty or
not including uncertainty. Other methods of scoring that do not rely on entirely future financial estimates can be used in
addition to or in replacement of the financial models. These other methods may consider purely strategic considerations or may
involve a number of criteria including risk factors, environmental factors, sociological factors, and so forth. The scoring models
are listed below:

a) Weighted Scoring models: These are models that use a common set of values for all of the projects up for selection. For
example, values can be profitability, complexity, customer demand, and so on. Each of these values are assigned a
weight to them-values of high importance have a high weight, while values of lesser importance have a lesser weight.
The projects are measured against these values and assigned scores by how well they match to the predefined values.
The projects with high scores take priority over projects will lesser scores. The figure below demonstrates the scoring
model.

4. Constrained Optimization Methods

Constrained optimization methods are complex mathematical formulas and algorithms that are used to predict the success of
projects, the variables within projects, and tendencies to move forward with selected project investments. For the exam,
thankfully all you need to know about these selection methods are that they are not typically used for most projects, but large,
complex projects. Here are the major constrained optimization methods:

49
  Linear programming
 Nonlinear programming
 Integer algorithms
 Dynamic programming
 Multi-objective programming

5. Expert Judgment
Have you ever heard the expression 'To be successful surround yourself with smarter people'? That's the idea of expert
judgment. When it comes to project selection, another tool management (and the project manager throughout the project) can
rely on is expert judgment. Expert judgment is a technique to rely on the experts within your organization, consultants,
stakeholders (including the project customers), professional associations, or industry groups for advice. These experts can
contribute to the project selection method by offering their opinion, research, and experience.

Project Proposal:

A facts-based project proposal would identify the specific benefits of such a project, the rough costs for developing the project‟s
associated product, some information about the scope of the project, project and project risks and uncertainties, and the key
stakeholders that may be involved. Benefits typically involve improving or solidifying an organization‟s financial position
(additional revenue and/or reduced costs) through improvements to products and/or processes or new products (or services).
Sometimes the benefit is not of a direct financial nature but is due to a compliance requirement of some external governing body.
Finally, proposals should be formalized as given below:

Project Proposal
Project Name: Date:____________
Proposing Organization
Benefitting Organization:
Performing Organization:
Proposed By:
Project Description:
50
Rough Proposal Start Date:_________ End Date:________ Cost: _________

Measurable Benefits:
1.
2.
N.

Cost Benefit Analysis:

Major Risks:

Organization Impact:

Customer Impact:

Key Stakeholders: Person Role/Responsibility Contact Info

1.
2.
N.

Notes:

Approval For further Evaluation

Benefitting Organization: Performing Organization:
By: By:
Date: Date:
51
Project Business Plan

Project Business Plan

Table of Contents
I. Opportunity
Background
Problem Description/Customer Needs
Market Window
Proposed Solution
Alternative Solutions
Consistency with Organizational Strategy
Critical Success Factors

II. Benefits
Description of Benefits
Mapping of Benefits to Problem Specifics
Quantification of Benefits
Measurement and Verification of Benefits

III. Resources (Schedule, Cost, People, other)

IV. Financial Analysis

Benefit Cost Ratio
Payback Period
Internal Rate of Return

V. Technical Feasibility

VI. Operational Feasibility

Operation
Maintenance
Total Cost of Ownership
52
VII. Economic Feasibility

VIII. Organization of Effort/Attention

Benefiting Organization
Performing Organization
Key Stakeholders
Project Organizational Framework

IX. Project Impacts

Performing Organization
Benefiting Organization
Other

X. Initial Risk Assessment

Internal
External
Risk of not Doing Project

XI. Security

XII. Other Issues

Organizational
Socio-Political
Legal, Ethical, Environmental, Health, Safety

53
 PROJECT PLANNING & SCHEDULING TECHNIQUES

There are two commonly used techniques in project planning & scheduling:

1. Critical Path Method (CPM)

2. Program Evaluation & Review Technique (PERT)

CRITICAL PATH METHOD (CPM)

This method was developed in 1950s by Morgan R. Walker of DuPont and James E. Kelley, Jr. of Remington Rand. The Critical
Path Method was developed and put into practice by DuPont and was a great success. CPM is commonly used with all forms of
projects, including construction, aerospace and defense, software development, research projects, product development,
engineering, and plant maintenance, among others. Any project with interdependent activities can apply this method of
mathematical analysis.

The essential requirement for using CPM is to construct a model of the project that includes the following:

1. A list of all activities required to complete the project (typically categorized within a work breakdown structure),

2. The time (duration) that each activity will take to completion, and

3. The dependencies between the activities

Using these values, CPM calculates the longest path of planned activities to the end of the project, and the earliest and latest that
each activity can start and finish without extending the project duration. This process determines which activities are "critical"
(i.e., on the longest path) and which have "total float" (i.e., can be delayed without making the project longer).

CPM network is constructed on the basis of activities and therefore it is activity oriented.

BASIC CONCEPTS:

Critical path: The longest time/path in a project network

54
EFTij  ESTij  t ij

LSTij  LFTij  t ij

EFTij  Earliest Finish Times of activity i to j

LSTij  Latest Start Times of activity i to j

ESTij  Earliest Start Times of activity i to j : This is obtained from the network diagram

LFTij  Latest Finish Times of activity i to j : This is obtained from the network diagram.

t ij  Duration of activity i to j

Forward pass: It is adopted to find the Earliest Start Times (EST). This is to find the earliest event time. In this approach, we take
the longest time or activity duration.

Backward pass: This approach is used to find the Latest Finish Times (LFT). This is to find the latest allowable time for an event.
In this approach, we take the shortest time or activity duration.

Slack: Slack = Latest Finish Time - Earliest Start Time

It should be noted that, slack for all events on the critical path will be zero.

Total Float (TF): The amount of time an activity can be delayed without affecting the overall project completion time. Critical
activities have zero float.

TFij  LSTij  ESTij

Free Float (FF): It is the amount of time by which by which an activity can be delayed without affecting the Earliest Start Times
of the subsequent activities.

FFij  TFij  Head Slack

55
Independent Float (IF):

IFij  FFij  Tail Slack

Question-1:

eSolutions Limited is considering to develop a Website for a client and the following information shows the main activities
involved in the project.

Activity Schedule

Activity Activity Description Immediate Duration (in

Identification Predecessor days)
A Setting up file structure and ______ 20
links
B Develop Graphics ______ 25
C Develop Web Content A 10
D Create Style Sheets & Templates A 12
E Link graphics with Web Content A, B, C 6
F Attach CSS & Templates, D,E 10
Upload test

You are required to do the following:

a) Develop a WBS
b) Draw the network and find Critical Path
c) Calculate Earliest and latest event, times, total, free and Independent floats
d) Total project duration

56
Solution:
a) WORK BREAKDOWN STRUCTURE

WORK BREAKDOWN STRUCTURE—TABULAR STRUCTURE

Website 1.0 File Design 1.1 Develop File structure

Development

1.2 Develop web content

1.3 Develop CSS & Templates

57
 1.4 Attach CSS & Templates

2.0 Graphics Design 2.1 Develop graphics

2.2 Link graphics with content

3.0 Deployment & 3.1 Upload files

Testing

3.2 Perform testing

58
 b) Network Diagram:

ESTij  Earliest Start Times of activity i - j

LFTij  Latest Finish Times of activity i - j

Forward Pass: Take the longest activity duration

Backward Pass: Take the minimum activity duration

59
FINDING THE CRITICAL PATH:

Examine the duration of all the paths and the critical path is the one with the longest duration of activities. Therefore the paths
are:

Path Duration Total Comment

1-2-4-5 20+12+10 32

1-2-3-4-5 20+10+6+10 46* Critical

1-3-4-5 25+6+10 41

CRITICAL PATH: 1-2-3-4-5

60
 c) Earliest & Latest event times, Total, Free & Independent floats:

The following expressions will be used to calculate the EFT and LST:

EFTij  ESTij  t ij

LSTij  LFTij  t ij

Where;

EFTij  Earliest Finish Times of activity i to j

61
LSTij  Latest Start Times of activity i to j

ESTij  Earliest Start Times of activity i to j : This is obtained from the network diagram

LFTij  Latest Finish Times of activity i to j : This is obtained from the network diagram.

t ij  Duration of activity i to j

COMPUTATION OF FLOATS:

There are three main types of floats and these are:

1. Total Float (TF)

2. Free Float (FF)
3. Independent Float (IF)

TFij  LSTij  ESTij

FFij  TFij  Head Slack

IFij  FFij  Tail Slack

62
Activity Schedule

Activity Duration TIME ESTIMATES & FLOATS

( t ij )
i-j EST EFT LST LFT TF FF IF

(2+3) (6-2) (5-3)

1-2 20 0 20 0 20 0 0 0

1-3 25 0 25 5 30 5 5 5

2-3 10 20 30 20 30 0 0 0

2-4 12 20 32 24 36 4 4 4

3-4 6 30 36 30 36 0 0 0

4-5 10 36 46 36 46 0 0 0

d) Total project Duration: 20 +10 + 6 +10 = 46 Days.

Question-2:

A,B,C, …, I constitute a project tasks. The notations X<Y means that the task X must be completed before Y can begin. With this
notation A<D, A<E, B<F, D<F, C<G, C<H, F<I, G<I. Other details of the project are given below:

Task: A B C D E F G H I

Time(Days): 8 10 8 10 16 17 18 14 9

63
Required:

a) Draw the network and find Critical Path

b) Calculate Earliest and latest event, times, total, free and Independent floats
c) Total project duration

Solution:

64
 Activity Schedule

Activity Activity Duration TIME ESTIMATES & FLOATS

( t ij )
Identification (i-j) EST EFT LST LFT TF FF IF

(2+3) (6-2) (5-3)

A 1-2 8 0 8 0 8 0 0-0=0 0-0=0

B 1-3 10 0 10 8 18 8 8-0=8 8-0=8

C 1-4 8 0 8 9 17 9 9-9=0 0-0=0

D 2-3 10 8 18 8 18 0 0-0=0 0-0=0

E 2-6 16 8 24 28 44 20 20-0=20 20-0=20

F 3-5 17 18 35 18 35 0 0-0=0 0-0=0

G 4-5 18 8 26 17 35 9 9-0=9 9-9=0

H 4-6 14 8 22 30 44 22 22-0=22 22-9=13

I 5-6 9 35 44 35 44 0 0-0=0 0-0=0

65
Question-3:

An IT project has the following information:

Activity Duration Activity Duration

(in Weeks) (in weeks)
(i-j) (i-j)
1-2 4 5-6 4
1-3 1 5-7 8
2-4 1 6-8 1
3-4 1 7-8 2
3-5 6 8-10 5
4-9 5 9-10 7

Required:

a) Draw the network and find Critical Path

b) Calculate EST, EFT, LST, LFT, total, free and Independent floats
c) Project duration
d) If activity 6-8 is delayed by 6 weeks, will this change the critical path? If so, what will be the new critical path?
Solution:

a) Network Diagram:

66
FINDING THE CRITICAL PATH:

Examine the duration of all the paths and the critical path is the one with the longest duration of activities. Therefore the paths
are:

67
CRITICAL PATH IDENTIFICATION:

Path Duration Total Comment

1-2-4-9-10 4+1+5+7 17

1-3-4-9-10 1+1+5+7 14

1-3-5-6-8-10 1+6+4+1+5 17

1-3-5-7-8-10 1+6+8+2+5 22* Critical Path

Critical Path: 1-3-5-7-8-10

68
 b) Calculation of Time Estimates:

Activity Schedule

Activity Duration TIME ESTIMATES & FLOATS

( t ij )
i-j EST EFT LST LFT TF FF IF

(2+3) (6-2) (5-3)

1-2 4 0 4 5 9 5

1-3 1 0 1 0 1 0

2-4 1 4 5 9 10 5

3-4 1 1 2 9 10 8

3-5 6 1 7 1 7 0

4-9 5 5 10 10 15 5

5-6 4 7 11 12 16 5

5-7 8 7 15 7 15 0

6-8 1 11 12 16 17 5

7-8 2 15 17 15 17 0

8-10 5 17 22 17 22 0

9-10 7 10 17 15 22 5

c) Project Duration: 1 + 6 + 8 + 2 + 5 = 22 Weeks.

69
 d) If activity 6-8 is delayed by 6 weeks, then the length of the path 1-3-5-6-8-10 will be 23 weeks and hence the path 1-3-5-
6-8-10 will be critical, since the total float is only 5 weeks.
e) Suppose, activity 1-3 takes 10 weeks instead of 1 week, then the lengths of three paths will be affected, since the Total
Float of this activity is zero. The revised lengths of the three paths will be:

Path Duration Total Comment

1-2-4-9-10 4+1+5+7 17

1-3-4-9-10 10+1+5+7 23

1-3-5-6-8-10 10+6+4+1+5 26

1-3-5-7-8-10 10+6+8+2+5 31* Critical Path

Still path 1-3-5-7-8-10 will be critical.

PROGRAM EVALUATION & REVIEW TECHNIQUE (PERT)

Program Evaluation & Review Technique (PERT) was developed primarily to simplify the planning and scheduling of large and
complex projects. It was developed by Bill Pocock of Booz Allen Hamilton and Gordon Perhson of the U.S. Navy Special Projects
Office in 1957 to support the U.S. Navy's Polaris nuclear submarine project. This technique was able to incorporate uncertainty
by making it possible to schedule a project while not knowing precisely the details and durations of all the activities. It is more of
an event-oriented technique rather than activity oriented. It is also applied to very large-scale, one-time, complex, non-routine
infrastructure and Research and Development projects. An example of this was for the 1968 Winter Olympics in Grenoble which
applied PERT from 1965 until the opening of the 1968 Games. The PERT method is commonly used in conjunction with the
critical path method (CPM).

70
PERT CONCEPTS

PERT event: a point that marks the start or completion of one or more activities. It consumes no time and uses no resources.
When it marks the completion of one or more tasks, it is not “reached” (does not occur) until all of the activities leading to that
event have been completed.

Predecessor event: an event that immediately precedes some other event without any other events intervening. An event can
have multiple predecessor events and can be the predecessor of multiple events.

Successor event: an event that immediately follows some other event without any other intervening events. An event can have
multiple successor events and can be the successor of multiple events.

PERT activity: the actual performance of a task which consumes time and requires resources (such as labor, materials, space,
machinery). It can be understood as representing the time, effort, and resources required to move from one event to another. A
PERT activity cannot be performed until the predecessor event has occurred.

Optimistic time ( t 0 ): the minimum possible time required to accomplish a task, assuming everything proceeds better than is
normally expected

Pessimistic time ( t p ): the maximum possible time required to accomplish a task, assuming everything goes wrong (but
excluding major catastrophes).

Most likely time ( t m ): the best estimate of the time required to accomplish a task, assuming everything proceeds as normal.

Expected time ( tˆei ): the best estimate of the time required to accomplish a task, assuming everything proceeds as normal (the
implication being that the expected time is the average time the task would require if the task were repeated on a number of
occasions over an extended period of time).

t o  4t m  t p
tˆei 
6

71
Lead time: the time by which a predecessor event must be completed in order to allow sufficient time for the activities that must
elapse before a specific PERT event reaches completion.

Lag time: the earliest time by which a successor event can follow a specific PERT event.

Float or Slack: is the amount of time that a task in a project network can be delayed without causing a delay - Subsequent tasks
(free float) or Project Completion (total float)

Slack: the slack of an event is a measure of the excess time and resources available in achieving this event. Positive slack would
indicate ahead of schedule; negative slack would indicate behind schedule; and zero slack would indicate on schedule.

Fast tracking: performing more critical activities in parallel

Crashing critical path: Shortening duration of critical activities

COMPUTATIONAL PROCEDURE:

PERT is a probabilistic model that takes into consideration uncertainties involved in the estimation of activity duration. This
technique uses three time estimates of activities:

1. Optimistic time ( t 0 )

2. Most likely time ( t m )

3. Pessimistic time ( t p )

72
CALCULATIONS:

Steps:

Step-1: Calculate Mean of all activities

t o  4t m  t p
tˆei 
6

Where;

tˆei  Expected time of activity i

Step-2: Calculate Variances for all activities

 t p  to 
2

V (t ij )   ij   
2

 6 

Step-3: Total Expected Time for critical activities/Expected project duration:

Te  E (t ij )  Sum of Expected times on the critical path

Or

Te  tˆe1  tˆe2  .....  tˆek

Where;

Te is the project completion time

Step-4: Find the Sum of Variances on the critical path:

V (Te )   Te   1   2  .....   k
2 2 2 2

73
Where; i  1, 2, .....k are critical activities.

Question-1:

Your company is considering taking up a project of developing a new Computer System for a client. The following activities are
involved:

Activity Activity Description Immediate Time in Days

Identification Predecessor t0 tm tp You are required to perform the
following:
A Select the Computer type - 4 6 8
B Design input / output A 5 7 15
a) Draw the network and find the
system
Critical Path
C Design Monitoring A 4 8 12
b) Compute the expected project
system
completion time
D Assemble Hardware B 15 20 25
c) What is the probability of
E Develop system program B 10 18 26 completing the project within
F Develop input/output C 8 9 16 55 days?
routines
G Create Database E 4 8 12
H Install the system D,F 1 2 3
I Test and Implement G,H 6 7 8

74
Solution:
COMPUTE THE MEANS:

t o  4t m  t p
tˆei 
6

4  24  8 36 15  80  25 120 4  32  12 48
tˆe1   6 tˆe4    20 tˆe7   8
6 6 6 6 6 6
5  28  15 48 10  72  26 108 1  8  3 12
tˆe2   8 tˆe5    18 tˆe8   2
6 6 6 6 6 6
4  32  12 48 8  36  16 60 6  28  8 42
tˆe3   8 tˆe6    10 tˆe9   7
6 6 6 6 6 6

COMPUTE THE VARIANCES:

 t p  to 
2

V (t ij )   ij   
2

 6 

84  25  15   12  4 
2 2 2
16 4 25 25 64 16
 12       42       72     
 6  36 9  6  36 9  6  36 9
 15  5  100 25  26  10   3 1
2 2 2
256 64 1 1
 22       52       82     
 6  36 9  6  36 9  6  36 9
 12  4   16  8  86
2 2 2
64 16 64 16 4 1
3 2
    6 2
    9 2
   
 6  36 9  6  36 9  6  36 9

Activity Activity t0 tm tp tˆei  ij 2

Identification
A 1-2 4 6 8 6 16/36=4/9

75
B 2-3 5 7 15 8 25/9
C 2-4 4 8 12 8 16/9
D 3-6 15 20 25 20 25/9
E 3-5 10 18 26 18 64/9
F 4-6 8 9 16 10 16/9
G 5-7 4 8 12 8 16/9
H 6-7 1 2 3 2 1/9
I 7-8 6 7 8 7 1/9

a) Network Diagram & Critical Path:

Path Duration Total Comment

1-2-3-5-7-8 6+8+18+8+7 47* Critical

1-2-3-6-7-8 6+8+20+2+7 43

76
1-2-4-6-7-8 6+8+10+2+7 33

Critical Path: 1 - 2 - 3 - 5 - 7 - 8

b) Project Completion Time:

Te = 6 + 8 + 18 + 8 + 7 = 47 Days

Therefore, Total project completion time is 47 days.

c) Probability of completing the project in 55 days:

Find the Sum of Variances on the critical path and calculate the Standard Deviation:

V (Te )   Te   1   2  .....   k
2 2 2 2

4 25 64 16 1 110
V (Te )   Te      
2

9 9 9 9 9 9
77
 T  V (Te )   T 2
e e

110
T   3.496
e
9
We can determine the probability of completing the project in 55 days as follows:

Since we assume that the project duration is normally distributed, then

X 
Z

Or

Te  
Z
T e

78
Let X  55

55  47
Z  2.89
3.496

P( X  55) = P(Z  2.89)  0.5  0.4981  0.9981  99.81%

79
 PROJECT CRASHING

(TIME-COST TRDE-OFF)

Project crashing is employed when we want to shorten the project completion time by spending extra resources on the project.
By spending additional resources the activity duration can be shortened or crashed. But there is a limit to this. Too much
additional resources may not reduce the project duration. Therefore, the project manager has to identify the crashing limit for
each activity and extra resources for crashing each activity.

There may be compelling reasons to complete a project earlier than originally planned. For example, the execution of a project
may get delayed due to certain reasons and as a result the project manager may be forced to reduce the duration of future
activities, so that the project is completed earlier or as per scheduled. Under these circumstances, additional resources can be
used to expedite some activities resulting in earlier completion of the project.

Question 1:
You are given the details of a project:

Task Immediate Normal Crash

Predecessor Time Weeks Cost (‘000’) Time Weeks Cost (‘000’)
A - 10 20 7 30
B - 8 15 6 20
C B 5 8 4 14
D B 6 11 4 15
E B 8 9 5 15
F E 5 5 4 8
G A,D,C 12 3 8 4

80
Indirect cost is GH¢ 400 per week. You are required to find the optimum project duration and the associated minimum project
cost.

Solution:

The network diagram with normal and crash times for various activities is given below:

81
 Normal Crash
Activity Time Cost Time Cost Crash Cost per Week Rank
(i-j) Weeks (‘000’) Weeks (‘000’)
1-4 10 20 7 30 10,000/3=3,333 5
1-2 8 15 6 20 5,000/2=2,500 3
2-4 5 8 4 14 6,000/1=6,000 6
2-3 6 11 4 15 4,000/2=2,000 2
2-5 8 9 5 15 6,000/3=2,000 2
5-6 5 5 4 8 3,000/1=3,000 4
4-6 12 3 8 4 1,000/4=250 1
71,000

Crash Cost - Normal Cost

Crash Cost per Unit Time 
Normal Time - Crash Time
Or
Crash Cost - Normal Cost
Crash Cost per Week 
Normal Time - Crash Time

30,000 - 20,000 10,000
Crash Cost per Week (1 - 4)    3,333
10 - 7 3

82
CRITICAL PATHS IDENTIFICATION:

Path Duration Normal Time Crash Time

1-4-6 10(7)+12(8) 22 15

1-2-4-6 8(6)+5(4)+12(8) 25 18*

1-2-3-4-6 8(6)+6(4)+0+12(8) 26* 18*

1-2-5-6 8(6)+8(5)+5(4) 21 15

Step-1: Activity 4-6 lies on the critical path and has the cheapest crashing cost of GH ¢ 250. Therefore, by crashing activities 4-6 by 4
weeks, the revised network diagram and paths are as follows:

Crash Cost = 4  250  1,000

83
REVISED CRITICAL PATHS:

Path Duration Normal Time Crash Time

1-4-6 10(7)+8 18 15

1-2-4-6 8(6)+5(4)+8 21 18*

1-2-3-4-6 8(6)+6(4)+0+8 22* 18*

1-2-5-6 8(6)+8(5)+5(4) 21 15

Step-2: The next step is to identify the activity that lies on the critical path and with minimum crash cost. Activity 2-3 is the most
appropriate. We need to crash this activity by 1 week, so that the three paths become critical. Therefore, by crashing activity 2-3
by 1 week, the revised network diagram and paths are as follows:

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Crash Cost  1 2,000  2,000

REVISED CRITICAL PATHS:

Path Duration Normal Time Crash Time

1-4-6 10(7)+8 18 15

1-2-4-6 8(6)+5(4)+8 21* 18*

1-2-3-4-6 8(6)+5(4)+0+8 21* 18*

1-2-5-6 8(6)+8(5)+5(4) 21* 15

Step-3: The next step is to identify the activity that lies on the critical path and with minimum crash cost. Activity 1-2 is now
most appropriate. We need to crash this activity by 2 weeks, so that the duration of all the three critical paths is reduced.
Therefore, by crashing activity 1-2 by 2 weeks, the revised network diagram and paths are as follows:
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Crash Cost  2  2,500  5,000

REVISED CRITICAL PATHS:

Path Duration Normal Time Crash Time

1-4-6 10(7)+8 18 15

1-2-4-6 6+5(4)+8 19* 18*

1-2-3-4-6 6+5(4)+0+8 19* 18*

1-2-5-6 6+8(5)+5(4) 19* 15

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Step-4: The next step is to identify the activities that lie on the critical paths and with minimum crash cost. Activities 2-3, 2-4 and
2-5 are now most appropriate. We need to crash these activities by 1 week, so that the duration of all the three critical paths is
reduced. Therefore, by crashing activities 2-3, 2-4 and 2-5 by 1 week, the revised network diagram and paths are as follows:

Crash Cost  1 2,000  1 6,000  1 2,000  10,000

REVISED CRITICAL PATHS:

Path Duration Normal Time Crash Time

1-4-6 10(7)+8 18* 15

1-2-4-6 6+4+8 18* 18*

1-2-3-4-6 6+4+0+8 18* 18*

1-2-5-6 6+7(5)+5(4) 18* 15

The crashing process ends here. There is no room for further crashing of activities.
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DETERMINATION OF TOTAL COSTS
Project Cost
Duration Indirect Cost Total Cost
Normal Crashing Cost Total
Weeks ( 400  7  2,800 )
Cost
26 71,000 0 71,000 26  2,800  72,800 143,800
22 71,000 4  250  1,000 72,000 22  2,800  61,600 133,600
21 71,000 1 2,000  2,000 73,000 21 2,800  58,800 131,800
19 71,000 2  2,500  5,000 76,000 19  2,800  53,200 129,200
18 71,000 1 2,000  81,000 18  2,800  50,400 131,400
1 6,000 
1 2,000  10,000

The optimum project duration is 19 weeks and the minimum cost is GH¢129,200

Practice Questions Set 1

Q1: Two junior project managers who are working on the same project are having a heated discussion (an argument) on the difference
between the project management life cycle and the project life cycle. The first project manager is saying there is essentially no difference
between the two while the second project manager is saying that there is a significant difference between the two. While this debate is
occurring, a senior vice president from your division interrupts the two and asks them the following question: “When the project is completed
what is the expected lifetime of the deliverable?” Essentially, what is the vice president asking them?

a. He is asking about the status of the project life cycle

b. He is asking about the status of the project management life cycle

c. He is asking about the status of the product

d. He is trying to determine if they understand life cycle costing

Q2: What is the BEST definition for a project manager’s role on the project?
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 a. Take instruction and direction from functional managers

b. Assigned by the organization to achieve project objectives

c. Balance stakeholder interests on the project

d. Effectively manage the project team while also being an expert technical resource

Q3: You are working as a PMP® for a company that typically does not implement charters for projects. As a result, an unusually high number of projects
in this organization fail on a yearly basis. You’ve just been placed on a high visibility project as the senior project manager and begin to work on elements
of the charter with the project sponsor. Senior management doesn’t understand why you’re wasting your time on this activity. What is the best thing
you can do in this situation?

a. Tell PMI about a fundamental breach in the PMI framework

b. Review the benefits of a well-defined project charter with senior management

c. Refuse to take on the project as you know this will most likely result in a project failure

d. Continue to work on the charter with the project sponsor. Demonstrate to senior management, on completion of the charter, how this benefited
the project and have the data and facts to back it up

Q4: There are multiple projects your organization is considering for the upcoming fiscal year. Project A has an NPV of $85,000. Project B is a $1 million
project and has the benefit cost ratio of 1.6. Project C has an internal rate of return (IRR) of 15%. Project D has a payback period of two years. Based on
this information which is the best project to select for execution?

a. Project B

b. Project C

c. Project D

d. Project A

Q5: Your project team members need to know, in very specific terms, what work needs to be completed on the project. Which of the following is the
least useful in describing what that work is?

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 a. WBS dictionary

b. The product scope

c. The project statement of work

d. Requirements traceability matrix

Q6: What is scope decomposition?

a. Breaking down the work into increments of less than 40 hours each

b. Breaking down the work to the work package level

c. Breaking down the work to the lowest level of detail possible

d. Breaking down the work by functional area

Q7: The project optimistic estimate is 10 weeks and the pessimistic estimate is 40 weeks. What is the standard deviation of the estimate?

a. 4

b. 5

c. 6.7

d. 7.5

Q8: What is the most correct definition of the critical path in a network diagram?

a. The shortest path through the network

b. The longest path through the network

c. The longest path through the network that contains zero or negative float

d. The shortest path through the network that cannot be compressed

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Q9: Earned value = 650, planned value = 550, actual cost = 700. What is the schedule variance at this point in time?

a. + 100

b. -50

c. -100

d. -150

Q10: What is estimate at completion (EAC)?

a. The amount of money that was budgeted for the project

b. The original budget plus the contingency reserves

c. A budget forecast that takes project variances into account

d. The budget at completion (BAC) times the TCPI

Answers
Q1: C - Explanation: The first part of the question is a red herring. The VP is asking about the lifetime of the deliverable i.e. the product. This is a question
about the product status.

Q2: B - Explanation: The key job of the project manager is to meet the organization’s project objectives. PMBOK® Guide, p. 13.

Q3: B - Explanation: You always want to show the stakeholder the effects of their actions/inactions. C and D are wrong – the PM does not take unilateral
action unless authorized to do so by the organization. Answers like A are usually wrong – this is the equivalent of “I’m telling the teacher what you did!”

Q4: D - Explanation: Did you pick BCR (B)? Without a documented breakdown of the benefits, you don’t know how much money you are making. Based
on the information provided, the only project that has an identified, quantified return is project ‘A’. Answer a. is incorrect – we do not know the actual
return based on the BCR. Answer b. is incorrect – a 15% IRR – fine… 15% of what? Answer c. is incorrect: payback of 2 years is nice, but what is the actual
payback?

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Q5: C - Explanation: The project statement of work provides the least level of detail – it is an input to develop the project charter and is an Initiating
activity. It is a “narrative description of products or services to be delivered by the project” PMBOK® Guide, p. 75. It references the 1) Business need, 2)
Product scope description (product characteristics) and 3) the Strategic Plan.

Q6: B - Explanation: Breaking the work down to the work package level. PMBOK® Guide, p. 116.

Q7: B - Explanation: By straight calculation: (P-O)/6 which translates to (40-10)/6 or 30/6 = 5.

Q8: C - Explanation: By definition the, critical path (CP) is the longest path through the network that contains no float or slack. PMBOK® Guide, p. 155.
After the CP is created, there are schedule compression techniques that can be applied, but each of these techniques carries risk. (Fast track or crash).

Q9: A - Explanation: SV = EV-PV or in this case, +100.

Q10: C - Explanation: EAC is a forecast. PMBOK® Guide, p. 185

Practice Questions Set 2

What are the basic principles of IT project management?

Projects are short-term efforts to create a unique product, service or environment, such as removing old servers, developing a custom e-
commerce site, creating new desktop images or merging databases.

All projects are constrained by three factors: time, cost and scope. For a project to be successful, these three constraints (often called the
Triple Constraints of Project Management) must be in equilibrium. If any constraint is out of balance, the project is heading for disaster.

All projects, IT or otherwise, move through five phases in the project management lifecycle: initiating, planning, executing, monitoring and
controlling, and closing. Each phase contains processes that move the project from idea to implementation.

Why do IT projects fail so often?

According to The Standish Group, which tracks IT project success rates, only 29 percent of IT projects conducted in 2004 were completed
successfully. The numbers are depressing for a variety of reasons.

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IT projects fail because they're just plain harder. They include the usual project-management challenges, such as deadlines, budget constraints
and too few people to devote to the project. But they also face unique technology challenges, from hardware, operating system, network or
database woes, to security risks, interoperability issues, and the changes manufacturers make to their hardware and software configurations.

IT projects fail at the beginning—not the end—due to a lack of sufficient planning. An IT organization must consider the resources it needs to
devote to a project, the skills required and the people who need to be involved, and realistically consider the time it will take to create, test
and implement the project deliverables. Otherwise, the project will be a mess. The IT organization will never complete it on time, on budget
or with the required functionality, which are three common factors for project success.

Third, IT projects fail because they're rushed. Because so many companies today rely on IT for a competitive advantage, they speed through
development efforts and systems implementations in order to be first to market with new, IT-based products, services and capabilities.
Organizations often feel that, to remain competitive, they must cut costs and maintain business operations, but that adds to the pressure on a
big, expensive project such as an ERP implementation or a platform upgrade. A project with inadequate planning, risk assessment and testing
is doomed from the start.

Finally, IT projects fail because their scope is too unwieldy. A project with a large scope can usually be better executed by breaking it down
into a series of smaller, more manageable projects. For example, a project to convert all of an organization's historical records, forms and
transactions from paper to an online digital database can be incredibly complex and time consuming. A series of smaller projects allows for
more manageable endeavors, such as first converting the existing records to digital, and then a second project to use the digital database
internally, and then a third project to bring the database to the Web. These smaller projects can be completed sequentially and with more
flexibility than a large, complicated and cumbersome project. To learn how JP Morgan Partners made a massive modernization project more
manageable, read "A Project Win for JP Morgan Partners."

How can I ensure that my projects are successful?

Organizations should create or adapt a standard approach to managing projects. Managers can quickly determine which ones are proceeding
smoothly and which are not when all projects follow the same processes and approaches, and use the same metrics for measuring project
performance. A standard approach to project management establishes ground rules and expectations for the project team. It also provides
project managers, functional managers and the operational staff with a common language around project management that eases
communication and helps ensure that everyone is on the same page.

Using a mishmash of project-management techniques makes it impossible for an organization to measure the success of its projects. And if
they can't measure their projects, they can't determine which processes and methodologies are working and which ones need to be improved.

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What are some common project-management methodologies, and which work best for various kinds of IT projects?

There are three leading approaches for managing IT projects. The first is based on traditional project management. It works with any IT
project regardless of the technology involved or the duration of the project work.

The second approach is called Extreme Programming. It's sometimes abbreviated as XP (not to be confused with the Windows operating
system.) Extreme Programming is a project-management approach designed specifically for software development. XP uses a software
development model that involves the users, customers and programmers in four iterative phases: planning, coding, designing and testing.

Scrum is the final leader in IT project management. This approach, named after a rugby term, also uses iterations of planning, coding,
executing and testing software. Scrum employs its own vernacular and has some rigid rules about meetings, hitting milestones and the
duration of planning activities.

Some companies have project-management offices. What's their purpose, and should I create one?

Many companies have adopted a project-management office (PMO) to centralize and coordinate all project-management activities, including
IT, across a company. PMOs establish ground rules and expectations around how projects should be conducted for the project manager, the
project team and the stakeholders. PMOs corral requests for changes to the scope of a project and provide training, tracking software, project
plan templates and process forms to the project manager and the project team to help ensure that projects proceed smoothly and conclude
successfully. In some companies, PMOs prioritize which projects are going to get done and when. They also say which resources will work
on which projects to prevent departments from fighting over resources.

A well-rounded PMO is often led by a well-versed and experienced project manager and is staffed with support personnel who relieve the
manager of busy work (keeping minutes from meetings, coordinating project records, communications and meeting with stakeholders.)

PMOs can exist inside or outside of IT departments. Some companies like to have one uber-PMO for all projects (whether they're IT
initiatives, research and development efforts or new product launches) that's independent of all of those departments. Project managers
typically report into PMOs. Dedicated project managers are often part of the PMO's staff, but employees who are named project manager for
a given initiative are not usually part of the PMO's staff because they have some other day-to-day responsibility in addition to their newfound
project-management responsibility.

The bad news about PMOs is that they can stifle project managers' leadership and management styles by dictating the methodologies project
managers must use and by making them follow specific (and often tedious) procedures for documenting work.

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How much authority should a project manager have?

Project managers need to be able to dictate the resources they need to complete a project successfully. If they don't have the authority to make
the decisions about staffing, processes and methodologies that affect a project's success, their hands are essentially tied. By the same token,
you don't want to give authority to an ineffective project manager.

Generally, the more experience a person has as a project manager, the more autonomy that project manager can expect. While this varies from
organization to organization, the power structure within an organization often dictates the project manager's authority.

Our business moves very fast while our projects seem to move slowly. What strategies can we use to get our
projects up to speed?

Slow and fast are subjective terms; what may seem slow to your organization may be entirely zippy somewhere else. It's important to
determine what's a reasonable time frame to complete an IT project based on the scope of the work, the expected deliverables and the
conditions of the project.

That being said, you can determine if your projects are in fact moving slowly. Do you have historical information against which to compare
current projects' speed, or have your projects always taken this long to complete?

Second, ask if your projects are effort-driven or of fixed duration. Effort-driven projects can be "crashed" by adding more resources to reduce
the project's time line. Crashing a project, however, adds costs. If your project is of fixed duration, like testing software for two months before
releasing it, there's not much that can be done to reduce the project's time line without increasing risk.

Regulations, laws and standards are common in my industry. How will they impact my IT projects?

Projects that must comply with laws and regulations require more up-front planning. For example, in the age of Sarbanes-Oxley, you have to
do a lot more documentation when you're developing a new business application or implementing new supply chain software. When project
managers consider the regulations that govern their industry, from manufacturing to health care, the regulations become project constraints
and result in more overhead. Factoring laws and regulations into projects also expands their scope and adds to their costs.

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I want to send my project managers through project-management training. What should I make sure they get out
of it, and how do I know the training will be worthwhile?

To get a good return on your investment, first identify what you want the project managers to know at the end of the project. Examine your
projects and determine where the pain is. Are your projects failing in scheduling, planning, executing, communications? Everything? By
determining where your projects need help, a project-management training provider can help your managers deliver better projects. There are
plenty of off-the-shelf training solutions, but often an on-site class unique to your organization allows you to create a custom solution with
more time focused on areas that need improvement and dismiss the areas your project managers have already mastered.

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