Presentation on theme: "ICS 442 Software Project Management"— Presentation transcript:
1 ICS 442 Software Project Management Unit 2Project Evaluation
2 Introduction Why evaluate? To decide a project feasibility Project Evaluation is normally carried out in Step0 of Step Wise.Why evaluate?To decide a project feasibilityTo assess the level of riskWhat is evaluated?Strategic issuestechnical issueseconomic issues
3 Strategic Issues Objectives What will the project contribute to the organisations objectives?# for example - may it contribute to increasing market share
4 Strategic Issues IS plan Does the proposed project fit into the organisations IS plan?- if yes then in which wayHow and will the proposed project fit with existing systems?- will it replace anyHow does it fit with proposed future developments?
5 Strategic Issues Organisation structure Will the project affect the current organisation structureManagement information system (MIS)Will it complement or enhance existing MISPersonnelSkill base, manning, availability, development
6 Technical Issues Is it really understood what is required technically If “no” can this be resolved before the start of the project.Will any lack of understanding cause changes to the project as it progress
7 Technical Issues What functionality is require Can hardware accommodate thisIs it within the bounds of current available software and/or programming languagesDo strategic issues place limitations on technical solutionsCost constraints on technical solutions
9 Cost-Benefit Analysis The comparison of estimated costs and benefitsThe general question iswill income and other benefits exceed costshow do the various project options compare
10 Cost-Benefit Analysis Analysis is in two stagesIdentify and estimate all costs and benefitsExpress costs and benefits into common unitsnormally monetary unitsCosts to be estimatedDevelopment costsSet-up costsOperational costs
11 Cost-Benefit Analysis Benefits to be estimateddirect benefitse.g. reduction in staffing levelsAssessable indirect benefitse.g. reduction in operator errorsIntangible benefitse.g. improved working conditions
12 Cash Flow ForecastingProvides an estimate of the expenditure incurred and the income generated throughout the life of the product.It is time relatedIt will provide an indication of when positive and negative cash flow will occur
13 Cash Flow ForecastingIt is not easy to get things right due to the number of uncertaintiesThe longer the whole life of the product the more uncertain is the forecastThe increase in alliance contracts and PPFI have increase the need for improving the accuracy of cash flow forecasting
14 Cost-Benefit Evaluation Techniques Five techniques will be explored, they are:Net profitPayback periodReturn on investment (ROI)Net present valueInternal rate of return
15 Cost-Benefit Evaluation Techniques Net ProfitNP = total income - total costA very simple techniqueDoes not consider time elementOf limited use when used in isolation
17 Cost-Benefit Evaluation Techniques Payback periodTime taken to break even- i.e. payback initial investmentProjects with short payback periods are preferred nowadaysDoes not consider income or expenditure after break even point is reached
18 Cost-Benefit Evaluation Techniques Net profit + payback periodCalculate the pay back period of each project?
19 Cost-Benefit Evaluation Techniques Return on investment (ROI)or Accounting rate of return (ARR)Compares investment required with net profitabilityROI= average annual profit / total investment x 100ROI for project 1 = 10,000 / 100,000 x 100 = 10%
20 Cost-Benefit Evaluation Techniques Net profit + payback period + ROI
21 Cost-Benefit Evaluation Techniques Net profit + payback period + ROIROI is Project 1 = 10% Project 2 = 2%Project 3 = 10% Project 4 = 12.5%
22 Cost-Benefit Evaluation Techniques ROI is simple to calculatethis makes it a popular methodBut, it has two major problemsIt does not consider the time elementThe ROI gets compared to bank interest rates-this is not a valid measure as timing and compounding of interest are no considered-This can lead to very misleading conclusions
23 Cost-Benefit Evaluation Techniques Net present value (NPV)considers profitabilitytakes account of the time elementNPV discounts future cash flows- to current money values- it does this using a percentage rate called the discount rate
24 Cost-Benefit Evaluation Techniques NPV a simple example using inflation£100 today = £100£100 today will be worth less in a 12 months time if inflation is 5%with 5% inflation £100 today = £95 in a years timetoday’s present value of £100 gained in 12 months time would be worth only £95 if inflation is 5%£100 gained in 5 years = £78 today if 5% inflation
25 Cost-Benefit Evaluation Techniques NPV a simple example (cont.)Another way of considering NPV is that it is the reverse of looking at the value of money from the past.i.e. with 5% inflation to have the same purchase value of £100 5 years ago you would need to spend £128 todayNPV considers the value of money in the future with today as the baseline
26 Cost-Benefit Evaluation Techniques The formula for net present values of future cash flows ispresent value = value in year t / (1+r)t- where r is the discount expressed as a decimal value- and t is the number of years in the futureA simpler method is to use discount tables- present value = value in year t x discount factor
27 Cost-Benefit Evaluation Techniques Now calculate the NPV for each of the four projects. [Assuming a 10% discount rate for projects 2, 3 & 4.]
28 Cost-Benefit Evaluation Techniques The NPV for project 1.
29 Cost-Benefit Evaluation Techniques The NPV for all four projects.
30 Cost-Benefit Evaluation Techniques Net present value disadvantagesmay not be comparable toother investmentscost of borrowing capitala solution to this is to utilise Internal Rate of Return
31 Cost-Benefit Evaluation Techniques Internal rate of return (IRR)provides a profitability measure as a percentage returnthis directly comparable to interest rateIRR is used in conjunction with NPV
32 Cost-Benefit Evaluation Techniques IRR is the discount rate when the NPV is 0e.g. in project 1 the IRR is just over 10%Calculation of IRR is trail and error when done by handIRR can also be estimated using a graphical methodSpreadsheet can often calculate IRR
33 Cost-Benefit Evaluation Techniques Using the graphical method
34 Cost-Benefit Evaluation Techniques NPV and IRR are not the complete answerfunding, future earning prediction, organisation context must all be taken into consideration
35 Risk Analysis All projects involve some form of risk Project evaluation has risks associated with itRisk Identificationpotential risks are identified, evaluated and rankedVarious analysis techniques availablee.g. Monte Carlo simulation
36 Risk Analysis Monte Carlo simulation (MCS) Simulation … an analytical method meant to model real life scenariosMCS utilises random numbers for deciding the input variablesNumerous simulations (often several 1000) are then performed utilising randomly generates inputsThe result is a simulated model of the real life system of interest.