Project Planning: Economic Evaluation.

José Onofre Montesa Andrés Universidad Politécnica de Valencia Escuela Superior de Informática Aplicada 2003-2004

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.

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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.

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The starting point...

• We have the project program.

Tarea: Especifica Necesidades Recursos: … Duración: 2 semanas Tarea: Diseño Programas Recursos: … Duración: 4 semanas Tarea: Codificación Program.

Recursos: … Duración: 7 semanas Tarea: Diseño B.D.

Recursos: … Duración: 2 semanas Tarea: Realización Esquema Recursos: … Duración: 1 semanas • We have the applied resources at every instant.

TAREAS Especificar Necesidades Diseño Programas Diseño Base de Datos Realización Esquema Codificación Programas Pruebas 0 2 4 6 8 10 12 14 16 SEMANAS 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 1 0 GpiI-2F Project Planning: Economic Evaluation.

Tarea: Pruebas Recursos: … Duración: 2 semanas 3

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.

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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.

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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.

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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.

1 2 3 4 5 6 7 8 9 Resource\Month Analyst Designer Programmer Consultant Tester GpiI-2F Project Planning: Economic Evaluation.

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Calculating the payment flow.

• Sequence the project payment: – Per resource consumption.

– Per each period.

Project

GpiI-2F Project Planning: Economic Evaluation.

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Obtaining the payment flow:

• For each period we accumulate the total resources use multiply by it’s cost.

Resource\Month Analyst Designer Programmer Consultant Tester Payment flow Indivi cost.

C 1 C 2 C 3 C 4 C 5 R 11 R 21 R 31 R 41 R 51 1 R 12 R 22 R 32 R 42 R 52 2 R 13 R 23 R 33 R 43 R 53 3 R 14 R 24 R 34 R 44 R 54 4 R 15 R 25 R 35 R 45 R 55 5 R 16 R 26 R 36 R 46 R 56 6 R 17 R 27 R 37 R 47 R 57 7 R 18 R 28 R 38 R 48 R 58 8 9 … … … … … … GpiI-2F Project Planning: Economic Evaluation.

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Accumulated payment representation (S).

accumulated expenditure 20 15 10 5 0 0 1 2 3 4 5 6 7 8 9 Planed

GpiI-2F Project Planning: Economic Evaluation.

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Calculating the income flow.

• Set of received incomes by the project development enterprise.

Project GpiI-2F Project Planning: Economic Evaluation.

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Obtaining the income flow.

• For each period we accumulate the total received incomes.

Resources/Month Client Subvention Commisions … Income flow I 11 I 21 I 31 I 41 1 I 12 I 22 I 32 I 42 2 I 13 I 23 I 33 I 43  I i1  I i2  I i3 3 I 14 I 24 I 34 I 44 4 I 15 I 25 I 35 I 45  I i4  I i5 5 I 16 I 26 I 36 I 46 6  I i6 I 17 I 27 I 37 I 47  I i7 7 I 18 I 28 I 38 I 48  I i8 8 9 … … … … … GpiI-2F Project Planning: Economic Evaluation.

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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.

Meses...

Flujo de ingresos Flujo de Pagos I 1 P 1 1 I 2 P 2 2 I 3 P 3 3 I 4 P 4 4 I 5 P 5 5 I 6 P 6 6 I 7 P 7 7 I 8 P 8 8 9 … … Flujo de Caja I 1 -P 1 I 2 -P 2 I 3 -P 3 I 4 -P 4 I 5 -P 5 I 6 -P 6 I 7 -P 7 I 8 -P 8 … GpiI-2F Project Planning: Economic Evaluation.

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Calculate the cash flow in the next project.

2A A B C D E F G H I J K 1A 2A 1A 1P 4P 1A 2P 2P 2P 9 1P 1 2 3 4 5 6 7 8 10 GpiI-2F Project Planning: Economic Evaluation.

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Taking into account:

• Analysts costs is: – 400 Euros per period.

• Programmers cost is: – 200 Euros per period.

• The developer enterprise will receive 10.000 Euros at the end of task J.

GpiI-2F Project Planning: Economic Evaluation.

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Graphic representation.

15000 10000 5000 0 -5000 -10000 Payment flow 800 1000 1200 900 1100 600 Income flow 0 0 0 0 0 0 Cash-Flow 400 0 400 1000 200 0 200 0 -800 -1000 -1200 -900 -1100 -600 -400 9600 -200 -200 Accumulated -800 -1800 -3000 -3900 -5000 -5600 -6000 3600 3400 3200

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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.

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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.

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Total volume of funds to

year,

assign, Example:

• We have a clear business, – We must paid 20.000 euros each week during one year, – We will obtain 4.000.000 euros at the end of the – 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.

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In this case: How much money does the enterprise have to dispose?

15000 10000 5000 0 -5000 -10000 Flujo pagos Flujo Ingresos Pagos Acumul.

Flujo de caja Acumulado 800 0 800 -800 -800 1000 0 1800 -1000 -1800 1200 0 3000 -1200 -3000 900 0 3900 -900 -3900 1100 0 5000 -1100 -5000 600 0 5600 -600 -5600 400 0 6000 -400 -6000 400 10000 6400 9600 3600 200 0 6600 -200 3400 200 0 6800 -200 3200

GpiI-2F Project Planning: Economic Evaluation.

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In this other case: How much money does the enterprise have to dispose?

8000 6000 4000 2000 0 -2000 -4000 Flujo pagos Flujo Ingresos Pagos Acumul.

Flujo de caja Acumulado 800 0 800 -800 -800 1000 0 1800 -1000 -1800 1200 2500 3000 1300 -500 900 0 3900 -900 -1300 1100 2500 5000 1400 100 600 0 5600 -600 -600 400 0 6000 -400 -1000 400 4000 6400 3600 2600 200 0 6600 -200 2400 200 0 6800 -200 2200

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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.

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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.

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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:

i



Future

Pr

esent

 110 100  0 , 1 • in %: the 10% GpiI-2F Project Planning: Economic Evaluation.

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Putting an amount in any

first period is:

moment.

• The present value at the end of the

present



future

1     1 • The future value in the n period is :

present



future n

   

n

• By induction.

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Comparing between the cash flow and the NPV

10000 8000 6000 4000 2000 0 -2000 1 2 3 4 5 6 7 8 9 10

GpiI-2F Project Planning: Economic Evaluation.

Cash-Flow NPV

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The accumulated in a project.

12000 10000 8000 6000 4000 2000 0 -2000 -4000 -6000 -8000 1 2 3 4 5 6 7 8 9 10 Cash-Flow NPV C-F Accumulated Accumulated updated

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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?

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Bibliography

• Romero, C. Tecnicas de Gestión de Empresas. CEPADE / Mundi Prensa, 1993. (Capítulo 2: Evaluzación financiera de proyectos de inversión).

• DeMarco, Tom. Controlling Software Projects. Prentice Hall, 1982.

• Page-Jones, Meilir. Practical Project Management, Dorset House, 1985.

• Shtub, A., Bard, J.F. ,Globerson, S., PROJECT MANAGEMENT, Engineering, Technology and Implementation, Prentice Hall International, 1994. (Capítulos 2 y 3: Engineering Economic Analysis; Project Screening and Selectión) • Uriegas Torres, Carlos. Análisis Económico de Sistemas en la Ingeniería, Limusa, 1987 GpiI-2F Project Planning: Economic Evaluation.

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