SDPM - Lecture 2a - Project evaluation – for the buyer, and for the vendor
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Transcript of SDPM - Lecture 2a - Project evaluation – for the buyer, and for the vendor
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Leiden Institute of Advanced Computer Science
Project evaluation – for the buyer, and for the vendor Prof. Dr. Thomas Bäck
1 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
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Leiden Institute of Advanced Computer Science
0. Select project
2 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
1. Identify project objectives 0. Select Project 2. Identify project infrastructure
3. Analyze pr. characteristics
4. Identify products and activities
5. Estimate effort for activity
6. Identify activity risks
7. Allocate resources
8. Review / publicize plan 9. Execute plan
10. Lower level planning
For each activity
Review lower level detail
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Leiden Institute of Advanced Computer Science
Cost-benefit analysis ! Idea: If project requires investment, as a minimum, the project
must provide a greater benefit than putting that investment in a bank account.
! Identify and estimate all costs and benefits of carrying out the project and operating the system.
! Express costs and benefits in common units.
3 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
• Costs: – Development costs – Setup costs – Operational costs
• Benefits: – Direct benefits – Assessable indirect benefits – Intangible benefits
Often difficult to quantify Relatively easy to quantify
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Leiden Institute of Advanced Computer Science
Cash flow forecasting
A typical product life cycle cash flow
4 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
Expe
nditu
re I
ncom
e
Time
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Leiden Institute of Advanced Computer Science
Cash flow forecasting Four project examples: 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
5 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
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Leiden Institute of Advanced Computer Science
Cost-benefit evaluation 1. Net profit
• Difference between total costs and total income over the life of the project
2. Payback period • Time to brake even or pay back the initial investment
3. Return on investment (ROI) • Net profitability of the investment required
• Popular, but: Takes no account of timing of cash flows ! 4. Net present value 5. Internal rate of return
6 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
%100_
__⋅=
investmenttotalprofitannualavgROI
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Leiden Institute of Advanced Computer Science
Cost-benefit evaluation (cont‘d) Net present value
• Considers profitability and cash flow timing • Discounting future cash flows by discount rate
Present value of any future cash flow: r: discount rate, t: number of years in future
( )trtyearinvaluevaluepresent
+=
1___
7 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
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Leiden Institute of Advanced Computer Science
Net present value: example Applying discount factors to project 1
Year Project 1 cash flow
Discount factor 10% Discounted cash flow
0 -100,000 1.0000 -100,000
1 10,000 0.9091 9,091
2 10,000 0.8264 8,264
3 10,000 0.7513 7,513
4 20,000 0.6830 13,660
5 100,000 0.6209 62,090
Net profit
50,000 NPV: 618
8 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
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Leiden Institute of Advanced Computer Science
Internal Rate of Return NPV is not directly comparable with earnings from other investments ! IRR: Profitability measure directly comparable with interest rates IRR = percentage discount rate that would produce NPV = 0 Calculate NPV for two discount rates; plot gives IRR (10.25%)
9 System‘s Development and Project Management - Prof. Dr. Thomas Bäck
NPV
Discount rate (%) 8 12 10
-6000
6000
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Leiden Institute of Advanced Computer Science
IRR: Example Project cash flow treated as an investment at 10%
Year Project cash flow forecast
Capital at start of
year
Interest during year
Capital at end of year
End of year
withdrawal 0 -100,000 - - - -
1 10,000 100,000 10,000 110,000 10,000
2 10,000 100,000 10,000 110,000 10,000
3 10,000 100,000 10,000 110,000 10,000
4 20,000 100,000 10,000 110,000 20,000
5 99,000 90,000 9,000 99,000 99,000
6 0 0 0 0 0
10 System‘s Development and Project Management - Prof. Dr. Thomas Bäck