Project Planning: Economic Evaluation. José Onofre Montesa Andrés Universidad Politécnica de Valencia Escuela Superior de Informática Aplicada

GpiI-2F Project Planning: Economic Evaluation.1 Goal. Now that we have the temporal project plan to answer to: –What will be done?, –Who will do it?, –When will it be done? –And, What are the necessary resources? We still have to answer: –How much will it cost? –How will the resource “capital” be applied?

GpiI-2F Project Planning: Economic Evaluation.2 Why? Money is important in the enterprise world. Our projects live in this context. Enterprises have a lot of projects, and the cost is an important criteria.

GpiI-2F Project Planning: Economic Evaluation.3 The starting point... We have the project program. We have the applied resources at every instant. Tarea: Especifica Necesidades Recursos: … Duración: 2 semanas Tarea: Diseño Programas Recursos: … Duración: 4 semanas Tarea: Diseño B.D. Recursos: … Duración: 2 semanas Tarea: Realización Esquema Recursos: … Duración: 1 semanas Tarea: Codificación Program. Recursos: … Duración: 7 semanas Tarea: Pruebas Recursos: … Duración: 2 semanas TAREAS Especificar Necesidades Diseño Programas Diseño Base de Datos Realización Esquema Codificación Programas Pruebas SEMANAS

GpiI-2F Project Planning: Economic Evaluation.4 Steps when creating the economical study. Cash-flow calculation: –Unitary valuation of each resource, –Calculating the payment flow, –Calculating the income flow, –Obtaining the cash-flow. Financial study: –Total volume of found to assign, –Cash-flow present value.

GpiI-2F Project Planning: Economic Evaluation.5 The costs from the project point of view. Directs: –The ones that can be clearly assigned to the project. For instance: Worked hours, consumed office materials... Indirects: –It’s not easy to evaluate the added value to the project, they are usually fixed in the enterprise. For instance: Electricity, telephone...

GpiI-2F Project Planning: Economic Evaluation.6 Unitary cost valuation of every resource. It must be applied all the project cost. Direct cost are easier to assign. Indirect cost are assigned as weigh up of direct cost. In this way we have an assigned cost of developers and not only they direct cost.

GpiI-2F Project Planning: Economic Evaluation.7 Obtaining the cash flow in a project. We start by fixing the payment periodicity: –Days, –weeks o Months. We group the use of resources by periods, (double entry table) –resource, –periods.

GpiI-2F Project Planning: Economic Evaluation.8 Calculating the payment flow. Sequence the project payment: –Per resource consumption. –Per each period. Project

GpiI-2F Project Planning: Economic Evaluation.9 Obtaining the payment flow: For each period we accumulate the total resources use multiply by it’s cost.

GpiI-2F Project Planning: Economic Evaluation.10 Accumulated payment representation (S).

GpiI-2F Project Planning: Economic Evaluation.11 Calculating the income flow. Set of received incomes by the project development enterprise. Project

GpiI-2F Project Planning: Economic Evaluation.12 Obtaining the income flow. For each period we accumulate the total received incomes.

GpiI-2F Project Planning: Economic Evaluation.13 Obtaining the cash-flow. It’s obtained subtracting the payment flow to the income flow. It’s call cash-flow because if you represent mentally a cash machine for the project, it is the flow that you can see.

GpiI-2F Project Planning: Economic Evaluation.14 Calculate the cash flow in the next project.

GpiI-2F Project Planning: Economic Evaluation.15 Taking into account: Analysts costs is: –400 Euros per period. Programmers cost is: –200 Euros per period. The developer enterprise will receive Euros at the end of task J.

GpiI-2F Project Planning: Economic Evaluation.16 Graphic representation.

GpiI-2F Project Planning: Economic Evaluation.17 Financial study : Money isn’t easy to get in the enterprise, It’s always compared with the opportunity cost. This leads us to have to observe the project from two points of view: –Total volume of funds to assign, –Updated cash flow.

GpiI-2F Project Planning: Economic Evaluation.18 Total volume of funds to assign. All projects are taken into account in the financial activity of the enterprise: –They are capital expense, return and –some needs in order to afford the payments. We must show the foreseen payments to be inserted in the enterprise reality.

GpiI-2F Project Planning: Economic Evaluation.19 Total volume of funds to assign, Example: We have a clear business, –We must paid euros each week during one year, –We will obtain euros at the end of the year, –There are no risk. The business seems clear to everyone. Do you think that it’s possible? –It´s hard to achieve

GpiI-2F Project Planning: Economic Evaluation.20 In this case: How much money does the enterprise have to dispose?

GpiI-2F Project Planning: Economic Evaluation.21 In this other case: How much money does the enterprise have to dispose?

GpiI-2F Project Planning: Economic Evaluation.22 We will do the same job, but, which is the best option? How much capital can we use in order to afford the project? Are euros equals: in one month and the next? What about the risk?

GpiI-2F Project Planning: Economic Evaluation.23 Updated cash flow. In order to compare the profitability all the projects need to have the same conditions. Several methods are used: –Net Present Value: NPV –Return On Investment: ROI –Internal Rate of Return: IRR We will use the NPV.

GpiI-2F Project Planning: Economic Evaluation.24 The rate “i” Money don’t have the same value now and in the future, and even they have the same value, lending money have a risk and the lender ask for a rate. We call rate to: in %: the 10%

GpiI-2F Project Planning: Economic Evaluation.25 Putting an amount in any moment. The present value at the end of the first period is: The future value in the n period is : By induction.

GpiI-2F Project Planning: Economic Evaluation.26 Comparing between the cash- flow and the NPV

GpiI-2F Project Planning: Economic Evaluation.27 The accumulated in a project.

GpiI-2F Project Planning: Economic Evaluation.28 The effects of delays in a project Supposing there is a delay in the project: –How does it affect the cash-flow? –How does it affect to the updated cash- flow? –How does it affect the updated accumulated cash-flow?

GpiI-2F Project Planning: Economic Evaluation.29 Bibliography Romero, C. Tecnicas de Gestión de Empresas. CEPADE / Mundi- Prensa, (Capítulo 2: Evaluzación financiera de proyectos de inversión). DeMarco, Tom. Controlling Software Projects. Prentice Hall, Page-Jones, Meilir. Practical Project Management, Dorset House, Shtub, A., Bard, J.F.,Globerson, S., PROJECT MANAGEMENT, Engineering, Technology and Implementation, Prentice Hall International, (Capítulos 2 y 3: Engineering Economic Analysis; Project Screening and Selectión) Uriegas Torres, Carlos. Análisis Económico de Sistemas en la Ingeniería, Limusa, 1987