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Project ManagementSharif MBA – Fall 1385

Session 4 - Dr. SepehriFeasibility Study, Project Selection

Burke Chapter 4-5

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Project Feasibility• Feasibility study ensures that projects are technically

and legally possible, and are economically justified.• Feasibility study must be managed as a mini-project

using planning and control, with its own life-cycle.• Senior manager has the responsibility to select the

project manager for feasibility study.• Project manager then selects the feasibility study

team, including a representative of future operators. • Decision to proceed with the feasibility study does

not mean the decision to go ahead with the project!

Not every project is doable!Not every project should be done!

Not every project makes the best use of company’s resources

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1- Feasibility Study Initiation

The lead up to the project feasibility study is the formalization of the project with the project charter.Project Feasibility Study should be formalized with requirements, boundaries, and expected outcomes:

• Who is responsible• Project brief to be analyzed• Who should be involved• Level of details• Budget for the feasibility study• Report back date

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2- Planning the Feasibility Study

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3- Stakeholder Analysis• The purpose of the needs analysis in feasibility study is

to determine needs and expectations of all stakeholders• Project stakeholders are people and organizations (both

internal and external) who are either actively involved in the project, or whose interests are affected by project.

• Originator• Owner• Sponsor• Project Champion• Users• Customers • Suppliers/Vendors

• Project Team• Senior Management• Functional Managers• Boss• Colleagues• Sub-contractors• Supports

• Health/SafetyAuthorities

• Trade Unions• Interest Groups• Lobby Groups• Government• Citizens

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Stakeholders Analysis• Stakeholders may be positively or negativelyaffected by the project (cannot cancel out!).

• Project manager must negotiate to build acoalition among stakeholders to move forward.

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4- Define the Client’s Needs• Function at a pre-defined rate• Operate in a specific environment• Have working life of so many years• Budget not to exceed $x amount• Meet certain specifications/standards• Achieve reliability requirements• Must be energy efficient• Meet health and safety regulations• Ease of maintenance and repairs• Provide opportunity for expansions • Etc.

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5. Evaluate Constraints• Internal Project Constraints

Technical, Technology, Resources, Budget, etc.• Internal Corporate Constraints

Financial, Marketing, Partner, Exports, Training• External Constraints

Laws & Regulations, Logistics, Environment

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Technology Transfer• Should we start the project now with the present technology or should we wait for better technology?

• At what point in the development should a design freeze, with the current technology, be imposed?

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6- Evaluate Alternatives and Options

By breaking down a complex project into components, by• work breakdown structure (WBS) or activity,• the project constraints,• the project objectives,

alternatives and options may be assessed more effectively.

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7- Gather InformationInformation is a pre-requisite for effective problem solving and decision making.The size of the company will influence how and where information is available.Responsibility for setting up a database of information should lie with either theproject office or the company’s general manager.

• Sales/Marketing Brochures • Books and Periodicals• Technical Reports• Bureau Specifications• Market Research• Internet• Stakeholders• Close-up Reports

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8- Value Management

Value Management is a structured, systematic and analytical process that seeks to achieve value for money by providing all the necessary functions at the lowest total cost, consistent

with desired levels of quality and performance.

• Identify unnecessary expenditures• Challenge assumptions• General alternative ideas• Promote innovation• Optimize resources• Save time, money, and energy• Simplify methods and procedures• Eliminate redundant items• Update standards, criteria, objectives

• Clarify customers’ needs• Create ideas• Challenge assumptions• Participate everyone• See the purpose• Seek lowest cost

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9- Cost Benefit Analysis

Initial cost-benefit analysis to establish the financial feasibility of the project.– Pareto improvement criteria: the project should make some

people better off without making anyone worse off.

– Hick-Kaldor test: the aggregate gains of the project should exceed aggregate losses.

– Willingness to pay: to determine how much your clients are prepared to pay for your product

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Communication Gap in Needs Assessment

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Project SelectionProject Selection = Investment Decision = Commitment for Future

• Production Consideration• Marketing Consideration• Financial Consideration• Personnel Consideration• Administration Consideration

• Maximize Profit• Utilize workforce• Increase Market share• Enter new markets• Improve image

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Numeric Methods – Payback Period

• Most widely used• Simple and quick• An initial filter• Future is uncertain

Payback Period =The time taken to gain a financial return equal to the original investment.

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Disadvantages =• No time value of money• Indifferent to the timing• Not for long-term projects• Based only on cash flow• Not consider risk exposure• Not consider total project

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Return on Investment (ROI)Average Annual Profit = (Total Gains) – (Total outlay) / No. of YearsReturn on Investment = Average Annual Profit / Original Investment

Profit ( A & B ) = $55,000 - $35,000Annual Profit = $20,000 / 4 = $5,000ROI = $5,000 / $35,000 = 14%

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Net Present ValuePresent Value = discount factor x cash-flowDiscount factor = 1 / (1+i)n

i = the forecast interest yearn = number of years from start

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Example of Net Present Value

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Net Present ValueDisadvantages of Net Present Value• Bias towards short run projects• Limited by accuracy of interest rate

Advantages of Net Present Value• Uses Time value of money• Allows for inflation/escalation

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Internal Rate of Return (IRR)IRR or DCF is the value of the discount factor when the NPV is zero.

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Example of IRR

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Net Present Value (NPV)using Variable Interest Rates

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Scoring ModelsFinancial and Non-financial factors with varying weights

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Break-even AnalysisBreak-even point = Fixed costs / Contribution per unit

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Project Life-cycle Cash-flow

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Choosing the Right Project

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Next Classes:• Today Sunday 30th of Mehr

• Regular class 12:20 pm Feasibility, Project Selection• Review session 1:20 pm Problem Solving, Exercises

• Tuesday 2nd of Aban• Finish Session 3 from last week• Session 4: Planning, Initiation and Integration

• Sunday 7th Aban• Regular Class: Case studies (TBA)• Review session: Problem Solving, Exercises

• Tuesday 9th Aban• Session 5: Scope Management

• Wednesday 10th Aban (make-up class)• Session 6 Organization Structure