PROJECT
EVALUATION
Contents
• Introduction
• Business case
• Project portfolio management
• Evaluation of Individual Projects
• Cost benefit evaluation techniques
Introduction
• A business case may be presented for several
potential projects, but there may be money or
staff time for only some of these projects.
• Managers need some way of deciding which
projects to select.
• This chapter will discuss some ways in which
projects can be evaluated and compared for
selection.
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.
Business case
• A typical business case contain
– Introduction and background to the proposal
– The proposed project
– The market
– Organizational and operational infrastructure
– The benefits
– Outline implementation plan
– Costs
– The financial case
– Risks
– Management plan
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.
Project Portfolio Management
• The concerns of project portfolio management
include
– Identifying which project proposals are worth
implementation.
– Assessing the amount of risk of failure that a
potential project has.
– Deciding how to share limited resources.
– Ensuring that projects do not duplicate work.
Evaluation of Individual Projects
Technical Cost-Benefit
Assessment Analysis
Cash Flow
Forecasting
Technical Assessment
• It consists of evaluating whether the required
functionality can be achieved with current
affordable technologies.
• The costs of the technology adopted must be
taken into account in the cost benefit analysis.
Cost-Benefit Analysis
• Even where the estimated benefits will exceed
the estimated costs, it is often necessary to
decide if the proposed project is the best of
several options.
• Not all projects can be undertaken at any one
time, therefore the most valuable projects
should get most resources.
Cost-Benefit Analysis
• A cost benefit analysis comprises of two steps
– Identifying all of the costs and benefits of carrying out
the project and operating the delivered application.
– Expressing these costs and benefits in common units.
Each cost and all benefits should be expressed, and
the net benefit should then be calculated.
• Most direct costs that are easy to quantify in
monetary terms are developmental costs, setup
costs and operational costs.
Cost-Benefit Analysis
• Activity 1
– Brightmouth college is considering the
replacement of the existing payroll service,
operated by a third party, with a customized, off
the shelf computer based system. List some of the
costs it might consider under the headings of
• Developmental Costs
• Setup Costs
• Operational Costs
Cash-Flow Forecasting
• A cash flow forecast indicates when
expenditure and income will take place.
• A forecast is needed of when expenditure, such
as the payment of salaries and any income are
to be expected.
• Accurate cash flow forecasting is difficult, as it is
done early in the project's life cycle and many
items to be estimated might be some time in
the future.
Cash-Flow Forecasting
• While estimating future cash flows, it is usual
to ignore the effects of inflation, as inflation
rate is uncertain.
• Moreover if expenditure is increased due to
inflation it is likely that income will increase
proportionately.
Cost-Benefit Evaluation Techniques
Payback
Net Profit
Period
Return on Net Present
Investment Value
Cost-Benefit Evaluation Techniques
YEAR Project 1 Project 2 Project 3 Project 4
0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200,000 30,000 30,000
2 10,000 200,000 30,000 30,000
3 10,000 200,000 30,000 30,000
4 20,000 200,000 30,000 30,000
5 100,000 300,000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
Cost-Benefit Evaluation Techniques
• Net Profit is the difference between the total
costs and the total income over the life of the
project.
• ACTIVITY 2: Considering the cash flows of four
projects provided in previous table, which
project should be selected if using the
technique of net profit.
Cost-Benefit Evaluation Techniques
• Payback Period is time taken to break even or
pay back the initial investment. Normally the
project with the shortest payback period is
chosen.
• ACTIVITY 3: Consider the four projects cash
flows given in table and calculate the payback
period for each of them. Which of them
should be selected using this criterion.
Cost-Benefit Evaluation Techniques
• Return on investment provides a way of
comparing the net profit to the investment
required. It provides a simple and easy to
calculate measure of return on capital.
ROI = average annual profit * 100
total investment
• ACTIVITY 4: Calculate the ROI for each of the
projects given in table and decide which on the
basis of this criterion is the most worthwhile.
Cost-Benefit Evaluation Techniques
• Net Present Value takes into account the
profit of a project and the timings of the cash
flows that are produced.
• It is based on the view that receiving $100
today is better than having to wait until next
year to receive it.
• For example invest $100 in a bank today and
receive $100 plus the interest in a year's time.
Cost-Benefit Evaluation Techniques
• If we say that the present value of $100 in a
year's time is $91, we mean that $100 after one
year is equal to $91 now.
• The equivalence of $91 now and $100 after 1
year means we are discounting the future
income by approximately 10%.
• The annual rate by which we discount future
earnings is known as the discount rate (10% in
above example).
Cost-Benefit Evaluation Techniques
• Present value of a cash flow can be calculated
by multiplying the cash flow by the
appropriate discount factor.
• The NPV for a project is obtained by
discounting each cash flow and summing the
discounted values.
Cost-Benefit Evaluation Techniques
• A table for discount factors is
Cost-Benefit Evaluation Techniques
• Assuming a 10% discount rate, the NPV for
project 1 would be calculated as
Cost-Benefit Evaluation Techniques
• ACTIVITY 5: Using a 10% discount rate,
calculate the NPVs for projects 2,3 and 4 and
decide which, on the basis of this, is the most
beneficial to pursue.
Reading
• [Chapter 2] “Software Project Management by
Bob Hughes and Mike Cotterell, McGraw-Hill
Education; 6th Edition (2009). ISBN-10:
0077122798”
