The conception phase / Project conception

Project Design

• The project design phase is the first step of project life cycle.

• In project design phase processes, resources, features and deliverables are planned
out

• After the project design phase, project charter and a project plan can be created
The conception phase / Project conception
Project Initiation

• What is Project Initiation?

• First phase of a project’s life cycle.

• Conduct feasibility studies, & check financial viability (cost benefit analysis).

• It is also a phase in which project are approved or denied by stakeholders

• What’s the Importance of the Project Initiation Phase?

• Project team assembled, project documentation are prepared to convince client.
The conception phase / Project conception
Project Initiation
Key Steps of the Project Initiation Phase

1. Create Project Initiation Documents

2. Conduct Feasibility Study (Technical, Economical, Legal, Market)

3. Assemble Project Team

4. Get Project Initiation Phase Approved

The conception phase / Project conception
Project Portfolio Management

• What is portfolio?

• What is project portfolio?

• What is project portfolio management?

Selection, prioritization and control of an organisation’s projects in line with its

strategic objectives

• What is aim of portfolio management?

To link the organization’ s projects directly to the goals and strategy of the
organization
The conception phase / Project conception
Project Vs Program Vs Portfolio Management
 Project Portfolio Selection decisions

A. Qualitative/Non-financial/Non-numeric Methods

Multi-Criteria Selection Models

1. Checklist Models
• The most frequently used method
• Uses a list of questions to determine projects’ acceptance or rejection
Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods

1. Checklist Model
Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods

1. Checklist Model
Merit
• Allow great flexibility and are easily used across different divisions and locations.
Demerit
• Fails to answer the relative importance of a potential project to the organization
• Fails to allow for comparison with other potential projects
How do we compare?
• To overcome shortcomings Multi-Weighted Scoring Model is recommended
Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods

2. Scoring Method/ unweight 0-1 factor method

• The simplest scoring approach lists multiple criteria of significant interest to

management

• Those projects that exceed a certain number of check - marks may be selected for
funding
Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods

3. Multi-Weighted Scoring Models

• Each selection criterion is assigned a weight.

• Scores are assigned to each criterion for the project, based on its importance to the
project being evaluated.

• A score, Sij, must be determined for how well each project i satisfies each criterion
j.
• The weights and scores are multiplied to get a total weighted score for the project.
Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods
3. Multi-Weighted Scoring Models

• Projects can then be compared using the weighted score.

• Projects with higher weighted scores are considered better.

Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods

• Weighted total points for each project.

• For example, project 5 has the highest value of 102 [(2 x 1) + (3 x 10) + (2 x 5) + (2.5
x 10) + (1 x 0) + (1 x 8) + (3 x 9) = 102]
Project Portfolio Selection decisions
A. Qualitative/Non-financial/Non-numeric Methods

4. The Sacred Cow

• The project is suggested by a senior and powerful official in the organisation.

5. The Operating Necessity

• This method selects any project that is necessary for continued operation of a
group, facility, or the firm itself.

6. The Competitive Necessity

• Project for the maintenance of a competitive position.

7. Comparative Benefit model

• Projects are subjectively rank ordered based on their perceived benefit to the
company
Project Portfolio Selection decisions

B. Quantitative / Financial / Numeric selection method

1. Pay back
• The payback model measures the time it will take to recover the project
investment.
• Shorter paybacks are more desirable.

Limitation
• It ignores the time value of money as well as any returns beyond the payback
period
• Less meaningful for longer periods of time.
Project Portfolio Selection decisions
B. Quantitative/financial/Numeric Methods

• The pay back formula is:

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑝𝑟𝑜𝑗𝑒𝑐𝑡 𝑐𝑜𝑠𝑡

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑 𝑌𝑒𝑎𝑟𝑠 =
𝐴𝑛𝑛𝑢𝑎𝑙 𝑠𝑎𝑣𝑖𝑛𝑔

Example:
• Project A has an initial investment of $700,000 and projected cash inflows of
$225,000 for 5 years. Project B has an initial investment of $400,000 and
projected cash inflows of $110,000 for 5 years. And required rate of return is 15%.
Project Portfolio Selection decisions
B. Quantitative/financial/Numeric Methods

2. NPV/ Discounted cashflow

• Minimum required rate-of-return to compute the present value of all net cash
inflows.
• If the result is positive, it is selected
• If the result is negative, the project is rejected.
Project Portfolio Selection decisions
B. Quantitative/financial/Numeric Methods

• The discounted cash flow method considers the time value of money, the inflation
rate
• When inflation rate is also given then the discounting term (1+k)t simply become
(1+k+inflation)t
Example

Q. Assume that Project X costs Rs 2,500 now and is expected to

generate year-end cash inflows of Rs 900, Rs 800, Rs 700, Rs 600 and
Rs 500 in years 1 through 5. The opportunity cost of the capital may be
assumed to be 10 per cent.

1-19
Solution

1-20
 Project Portfolio Selection decisions
B. Quantitative/financial/Numeric Methods

Q. Project A has an initial investment of $700,000 and projected cash inflows of $225,000 for 5 years.
Project B has an initial investment of $400,000 and projected cash inflows of $110,000 for 5 years. And
required rate of return is 15%.

Q. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and
$15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of
return is 20 percent, and inflation will 5% for next five years conduct a discounted cash flow calculation
to determine the NPV.

Ans: 6467.51
Project Portfolio Selection decisions
B. Quantitative/financial/Numeric Methods

3. Profitability Index (PI)

Profitability index is the ratio of the present value of cash inflows, at the required
rate of return, to the initial cash outflow of the investment.
Acceptance Rule
• The following are the PI acceptance rules:
• Accept the project when PI is greater than one. PI > 1
• Reject the project when PI is less than one. PI < 1
• May accept the project when PI is equal to one. PI = 1
 Project Portfolio Selection decisions
B. Quantitative/financial/Numeric Methods

Q. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000,
$20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project.
If the required rate of return is 20 percent, and inflation will 5% for next five years conduct
a discounted cash flow calculation to determine the NPV.

Ans: NPV = 6467.51; PI >1

Project feasibility
• A feasibility study is used to determine the viability of an idea.

• The project feasibility studies focus on:

- Technical Analysis
- Market Analysis
- Economic Benefit
- Financial Analysis
- Project Risk and Uncertainty

• It tells us whether a project is worth the investment.

Project feasibility
Technical Analysis
• Technical analysis is based on the description of the product and specifications
and also the requirements of quality standards.
• Special attention is given to technical dimensions of the project

Market Analysis
• A market feasibility study determines whether your project has the potential to
succeed in the market
Economic Benefits
• The economic benefits include employment generation, economic development of
the area where the project is located, optimal use of resources.
Project feasibility
Financial Analysis
• The Financial Analysis, examines the viability of the project from financial
considerations and indicates the return on the investments.

Some of the commonly used techniques for financial analysis:

(1) Pay-back period
(2) Net Present Value (NPV)
(3) Profitability Index (PI)
(4) Decision Analysis
Project feasibility
Decision Analysis

(5) Decision Analysis

• Decision analysis is systematic approach to the study of decision making and help
decision maker to take best possible decisions.

The Five Steps in Decision Analysis

I. Clearly define the problem at hand.
II. List all possible decision alternatives (course of action available).
III. Identify the possible future outcomes for each decision alternative.
IV. Identify the payoff (profit or cost) for each combination of alternatives and
outcomes.
V. Select one of the decision analysis modeling techniques.
Project feasibility
Decision Analysis
The Five Steps in Decision Analysis
• E.g., A Lumber Company
• Suppose decision maker wants to use net profits to measure his payoffs. For that
he has to evaluate the potential profits associated with the various combinations of
alternatives and outcomes.
• Suppose he has already evaluated profit for various combination of alternatives &
outcomes:
a) If decision maker to build a large plant, he thinks that with high demand for
sheds, the result would be a net profit of $200,000 to his firm. The net profit
would, however, be only $100,000 if demand were moderate. If demand were
low, there would actually be a net loss of $120,000
b) If he builds a small plant, the results would be a net profit of $90,000 if there
were high demand for sheds, a net profit of $50,000 if there were moderate
demand, and a net loss of $20,000 if there were low demand.
c) doing nothing would result in $0 payoff in any demand scenario.
• Construct Payoff table, or decision table
Project feasibility
Decision Analysis
The Five Steps in Decision Analysis
 Project feasibility
Decision Analysis
Decision making under uncertainty
Model

a. Maximax (computed directly from the decision (payoff) table)

b. Maximin (computed directly from the decision (payoff) table)

c. Criterion of realism or Hurwicz (computed directly from the decision (payoff) table)

d. Equally likely or Laplace (computed directly from the decision (payoff) table)

e. Minimax regret (computed from opportunity loss table)

 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
a. Maximax (computed directly from the decision (payoff) table)
• First locate the maximum payoff for each alternative and then select the alternative with the
highest value among these maximum payoffs.

• It is also called the Optimistic criterion.

 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
b. Maximin (computed directly from the decision (payoff) table)
• First locate the minimum payoff for each alternative and then select the alternative
with the highest value among those minimum payoffs.
• It is also called the pessimistic criterion.
 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
c. Criterion of realism or Hurwicz (computed directly from the decision (payoff) table)

• The criterion of realism uses the weighted average approach.

• we use a parameter called the coefficient of realism to measure the decision maker’s
level of optimism regarding the future.

• This coefficient, denoted by a, has a value between 0 and 1.

 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
c. Criterion of realism or Hurwicz (computed directly from the decision (payoff) table)
 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
c. Criterion of realism or Hurwicz (computed directly from the decision (payoff) table)

• Build large plant: 0.45 x (200,000) + 0.55 x (-120,000) = 90,000 -66,000 = 24,000

• Build small plant: 0.45 x (90,000) + 0.55 x (-20,000) = 40,500 -11,000 = 29500

• Build No plant: 0.45 x 0 + 0.55 x 0 = 0

 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
d. Equally likely or Laplace (computed directly from the decision (payoff) table)

• We first calculate the average payoff for each alternative and then pick the alternative
with the maximum average payoff.
 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
d. Equally likely or Laplace (computed directly from the decision (payoff) table)
200,000+100,000−120,000
• =60,000
3

90,000+50,000−20,000
• = 40,000
3
0 + 0+ 0
• =0
3
 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
e. Minimax regret (computed from opportunity loss table)
• First develop the opportunity loss table from the payoff table.
• To do so, subtract each payoff for a specific outcome from the best payoff for that
outcome.
 Project feasibility
Decision Analysis
Decision making under uncertainty
Model
e. Minimax regret (computed from opportunity loss table)
• Locate the maximum opportunity loss (regret) for each alternative, then pick the
alternative with the smallest value among these maximum regrets.
 Project feasibility
Decision Analysis
Decision making under Risks
Model
a. Expected Monetary Value

• Selecting the alternative with the highest expected monetary value.

• Probabilities of high demand, moderate demand, and low demand are 0.3, 0.5, and 0.2,
respectively

• Given a decision table with payoffs and probability, determine the expected monetary
value (EMV) for each alternative.

• Select The largest EMV.

Project feasibility
Decision Analysis
Decision making under Risks
Model
Expected Monetary Value

The largest EMV, $86,000, results from the first alternative, build a large plant.