Project Initiation

& Integration
Topic # 3
Chapter 4 – Schwalbe
 Project Integration Management
• Project integration management involves coordinating all of
the other project management knowledge areas throughout a
project s life cycle.
• Project Integration Management Summary:
 Project Selection
• Managers need some ways to decide which
project(s) to select.
• Some ways:
– Technical Assessment
– Cost Benefit Analysis
– Cash Flow Forecasting
– Strategic Assessment
 Methods for Selecting Projects
• Focusing on broad organizational needs
• Categorizing IT projects (Problems,
Opportunities and directives)
• Performing net present value or other
financial analysis
• Using a weighted scoring model
• Implementing a balanced scorecard
 Strategic Assessment
• Not all projects can be assessed on some numeric values like quantified
costs or benefits
• Assessment is based on fulfillment of strategic objectives when combined
with other projects, can also take place.
• Programmes are formed that are collection of projects contributing to
same overall organization goals.
Programmes may be.
• Strategic
• Business cycle programmes
• Infrastructure programmes
• Research and development programmes
• Innovative partnerships
 Technical Assessment
• Evaluation whether the required functionality can be achieved
with current affordable technologies.
• The cost of the technology adopted must be taken into account
in the cost benefit analysis.

Limitations:
• Nature of solution produced by strategic information system
plan.
• Cost of solution . Hence undergo cost benefit analysis.
 Economic Assessment – Why?
 Consider whether the project is the best among other options
 Prioritise the projects so that the resources can be allocated effectively if several
projects are underway
Note: A common way is to compare the expected costs of development and operation of
the system with the benefits of having it in production

Economic Assessment – How

 Cost-benefit analysis
 Cash flow forecasting
 Various cost-benefit evaluation techniques
 Net Profit, Payback Period, ROI ,NPV and IRR

Cost-benefit analysis is to compare the estimated costs of development and operation

of a system with the estimated benefits of putting the system in place.

Why need Cash flow forecasting? It is because the excess of benefits over costs is not
sufficient to justify the implementation of a proposed project.
 Cost Benefit Analysis
• Cost includes:
– Development costs (salaries and employment costs, H/w &
s/w platform costs,
– Setup costs (training, new hardware, Database conversion)
– Operational costs (support, maintenance, hosting, license,
backup)
• Benefits:
– Direct Benefits
– Assessable indirect benefits (increased accuracy as easy to
use software)
– Intangible benefits
 Financial Considerations for
Selecting Projects
• Three primary methods for determining the
projected financial value of projects include
– Net Present Value (NPV),
– Return on investment (ROI) and
– Payback period.
 Payback Analysis
• Payback analysis – a technique for
determining if and when an investment will
pay for itself.
• Payback period – the period of time that will
lapse before accrued benefits overtake
accrued and continuing costs.
 Return-on-Investment Analysis
(ROI)
Return-on-Investment (ROA) analysis – a
technique that compares the lifetime
profitability of alternative solutions.
The ROI for a solution or project is a percentage rate that measures
the relationship between the amount the business gets back from an
investment and the amount invested.

Lifetime ROI = (estimated lifetime benefits –

estimated lifetime costs) / estimated
lifetime costs
 Net profit
Year Cash-flow ‘Year 0’ represents all the
0 -100,000 costs before system is
operation
1 10,000
‘Cash-flow’ is value of
2 10,000
income less outgoing
3 10,000 Net profit value of all the
4 20,000 cash-flows for the
5 100,000 lifetime of the
application
Net
50,000
profit
 Pay back period
This is the time it takes to start generating a surplus of
income over outgoings. What would it be below?

Year Cash-flow Accumulated

0 -100,000 -100,000
1 10,000 -90,000
2 10,000 -80,000
3 10,000 -70,000
4 20,000 -50,000
5 100,000 50,000 Payback Period = 4.5 years
 Return on investment (ROI)

ROI = Average annual profit X 100

Total investment

In the previous example

• average annual profit
= 50,000/5
= 10,000
• ROI = 10,000/100,000 X 100
= 10%
 Net Present Value (NPV)
• NPV is a method of calculating the expected
net monetary gain or loss from a project by
discounting all expected future cash inflows
and outflows to the present point in time.
• The time value of money recognizes that a
dollar today is worth more than a dollar one
year from now.
 Net present value
Would you rather I gave you £100 today or in 12
months time?
If I gave you £100 now you could put it in savings
account and get interest on it.
If the interest rate was 10% how much would I
have to invest now to get £100 in a year’s time?
This figure is the net present value of £100 in one
year’s time
 Present Value Formula
Present value – the current value of a dollar
at any time in the future.
value in year n
PV 
(1  r ) n

Where n is the number of years and i is the discount rate.

Discount rate – a percentage similar to interest rates that

you earn on your savings.
In most cases the discount rate for a business is the opportunity cost
of being able to invest money in other projects or investments
- In case of 10% discount rate and one year
-Discount factor = 1/(1+0.10) = 0.9091
- In case of 10% discount rate and two years
-Discount factor = 1/(1.10 * 1.10) = 0.8294
NPV & Payback Analysis
 Payback Period & ROI
• The Payback period for the project:
– Payback time = 3 + (51,611/133,560)
– Payback time = 3.4 years.
• ROI
– ROI = 62.8%
– ROI per year = 10.46% per year
 Internal rate of return
• Internal rate of return (IRR) is the discount
rate that would produce an NPV of 0 for the
project
• Can be used to compare different investment
opportunities ( bank, rebort system, gold,
mutual fund etc)
• There is a Microsoft Excel function which can
be used to calculate
 Cost Benefit Evaluation Techniques

Technique Advantages Disadvantages

Net Profit Simple to Use -Does not show profit relative to size
of investment -Ignores the Timing of
cash flow

Payback Period -Simple to calculate, not particular -Ignores any income (or expenditure)
sensitive to small forecasting errors. after the payback period.
-Give some idea of cashflow impact -Ignores overall profitability of
project

Return on simple and easy to calculate, quite -Ignores the timing of the cash flow.
Investment popular -Potentially very misleading because
(ROI) rate of return bears no relationship
with the current interest rates
 Cost Benefit Evaluation Techniques - NPV
Discounted
Cashflow Cashflow Discount Factor (10%) Cashflow Project 1 Discounted Cashflow
Year
Project 1 Project 2 PV = 1/(1+r)n (cash flow * Project 2
discount factor)
0 -100,000 -100,000 1 -100,000 -100,000
1 10,000 30,000 0.9091 9091 27273
2 10,000 30,000 0.8264 8264 24792
3 10,000 30,000 0.7513 7513 22539
4 20,000 30,000 0.683 13,660 20490
5 100,000 30,000 0.6209 62,090 18627

Net profit 50,000 50,000

NPV 618 13,721

Though Project 1 and 2 have same initial investment and net profits but significant different in
NPV value. This difference in NPV reflects, we must wait longer for the bulk of income.

Technique Advantages Disadvantages

Net Present Value -Takes into account the profitability. -Hard to select an appropriate discount
-Consider the timings of payments. rate.
-Consider economic situation -May not be directly comparable with
through discount rate. earnings from other investments or the
costs of borrowing capital
 Weighted Score Model – Selecting
Projects
• A weighted scoring model is a tool that provides a
systematic process for selecting projects based on
many criteria.
• These criteria can include factors such as meeting
broad organizational needs; addressing problems,
opportunities, or directives; the amount of time it
will take to complete the project; the overall priority
of the project; and projected financial performance
Of the project.
Example- Weighted Score Model
 Business Drivers
• Business Driver: The root cause(s) for the project
development.
• Business drivers are the crucial forces behind the successful
development of a project.
• As the result one can define the business case for sustainable
project development.
 Critical Success Factors
• Critical success factors (CSFs), also known as Key Results Areas
(KRAs), refer to the activities that must be completed to a high
standard of quality in order to achieve the goals of your project.
• CSFs are a way to prioritize certain tasks as the project plan is being
executed.
• Having clear CSFs helps the project team clarify what needs to be
worked on first or needs special attention, allowing people to work
together to achieve the project’s main objectives.
 Business Case
• The objective of business case is to provide a
justification for the project by showing that
the benefits of the project will exceed the
costs of development, implementation and
operation.
 Feasibility Study or Project
Justification – Business Case
• Introduction & Background to the proposal
• The market
• Organization & Operational Infrastructure
• Benefits
• Outline implementation Plan
• Costs
• The financial case
• Risks
 Project Portfolio Management
• Project portfolio provides an overview of all
the projects that an organization is
undertaking or considering.
• It prioritizes the allocation of resources to
projects and decides which new projects
should be accepted and which should be
dropped.
END OF TOPIC 3

-COMING UP!!!!!!
-Project Team
-Project Scope Management
-WBS

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