Conceptualisation Stage Continued 1 of 27 Conceptualisation - - PowerPoint PPT Presentation

Conceptualisation Stage Continued

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Conceptualisation

• Inputs to conceptualisation stage
• Influencing factors
• Stakeholder analysis
• Feasibility
• Risk
• Outputs from conceptualisation stage

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Feasibility

• Based on the analysis so far, the

following must be defined:

• Major requirements
• Project constraints
• Project goals and objectives
• Project scope
• Success criteria

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Feasibility

• Feasibility must be considered:
• Technical feasibility
• Operational feasibility
• Financial feasibility
• Include initial risk assessment of project

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Feasibility

• Technical feasibility
• Is the technology available?
• What is the risk associated with the

technology?

• Risk of failure
• Risk of becoming obsolete
• Are the skills available?

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Feasibility

• Operational feasibility
• Can solutions be found to meet users’ needs?
• Do the users want the new product?
• Will the new product be used?
• Is the product user-friendly?
• What are the knock-on effects?

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Feasibility

• Financial feasibility
• Is the money available?
• Cost-benefit analysis
• Breakeven point/Payback period
• % Return On Investment
• Net Present Value
• Internal Rate of Return

(See Burke, 2003)

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Credit Crunch

• Normally expect prices to go over time
• Current financial climate
• inflation is low
• 0% interest on some investments
• Some prices lower now than last year

Links to some recent news on inflation: http://www.bbc.co.uk/news/business-21506563 http://www.bbc.co.uk/news/business-19959827 http://www.tradingeconomics.com/united-kingdom/inflation-cpi

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Break-even point / Payback period

• Calculates time at which inflow matches investment
• The longer the time until breakeven…

…the less attractive the project

• More accurate to use Present Value
• evaluate different project options
• choose most cost-effective option

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Break-even point / Payback period

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Break-even point / Payback period

• Example projects
• Project Alpha: 29 months
• Project Beta: 7.5 months
• Project Gamma: 76 months
• Will have different values using PV
• Project Gamma less attractive

– too long to breakeven

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Internal Rate of Return

• Considers growth of money from project, rather than cash
• IRR is amount of profit as % that project will produce
• Some companies set minimum rate for IRR: “hurdle”
• Hurdle may be ignored for projects for compliance with regulations
• MS Excel has built-in function for IRR
• Positive – looks at profit, not just investment
• Negative – might not be aware of amount at risk

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Internal Rate of Return

• Example projects – company hurdle 12%
• Project Alpha: 42%
• Project Beta: 170%
• Project Gamma: -8%
• Project Beta better than Project Alpha
• Project Gamma shows a loss
• not a good choice on financial metrics alone

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Return on Investment

• Percentage return on the project cost
• Divide net income by investment
• Evaluate different project options
• Better to use present value in calculations

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• Example projects
• Project Alpha: 45%
• Project Beta: 178%
• Project Gamma: 16%
• Project Gamma above company IRR hurdle of 12% here
• ther calculations show NPV and IRR are both negative
• also payback period longer than other projects
• not a good choice

Return on Investment

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Net Present Value

• Money today is not worth the same as

money in the future (or in the past)

• If we calculate future cost in today’s terms
• evaluate different project options
• choose most cost-effective option
• but interest rate predictions are not reliable…

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Net Present Value

• “If Amy lends Brian £1500 this year,

Brian will repay Amy £500 next year, the year after and the year after that.”

• What is this worth?
• The apparent value of £1500 = 3 times £500, but this

does not take account of changing values over time…

• We will consider the effect of two different rates

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Net Present Value – DCF 10%

Year Amy's income £ Amy's

• utlay

£ Apparent value £ DCF 10% Value at 10% £ Brian's income £ Brian's

• utlay

£ Apparent value £ DCF 10% Value at 10% £

• 1500
• 1500

1.00

• 1500

1500 1500 1.00 1500 1 500 500 0.91 455

• 500
• 500

0.91

• 455

2 500 500 0.83 415

• 500
• 500

0.83

• 415

3 500 500 0.75 375

• 500
• 500

0.75

• 375

Total 1500

• 1500
• 255

1500 1500 255

• For Amy, the Net Present Value is £1500 - £1245 = -£255
• For Brian, the Net Present Value is -£1500 + £1245 = £255
• Brian pays £255 less than Amy at today’s values if the DCF of

10% is right

• Amy’s loss is Brian’s gain

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Net Present Value – DCF 12%

Year Amy's income £ Amy's

• utlay

£ Apparent value £ DCF 12% Value at 12% £ Brian's income £ Brian's

• utlay

£ Apparent value £ DCF 12% Value at 12% £

• 1500
• 1500

1.00

• 1500

1500 1500 1.00 1500 1 500 500 0.89 445

• 500
• 500

0.89

• 445

2 500 500 0.80 400

• 500
• 500

0.80

• 400

3 500 500 0.71 355

• 500
• 500

0.71

• 355

Total 1500

• 1500
• 300

1500 1500 300

• For Amy, the Net Present Value is £1500 - £1200 = -£300
• For Brian, the Net Present Value is -£1500 + £1200 = £300
• Brian pays £300 less than Amy at today’s values if the DCF of

12% is right

• Amy’s loss is Brian’s gain

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Net Present Value

• Choice between two projects:
• Project A
• purchase equipment
• annual maintenance contract
• insurance
• Project B
• rent equipment
• insurance
• One project may appear be more attractive

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Net Present Value

• Use Discounted Cash Flow (DCF) factors
• Project A
• purchase equipment
• annual maintenance contract
• insurance
• Project B
• rent equipment
• insurance
• Is the same project still the more attractive?

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Net Present Value

• One DCF rate might make project B appear

more attractive

• Another DCF rate might make project A appear

more attractive

• We cannot choose what the DCF rate will be
• DCF rates are used to estimate the future financial environment
• different DCF rates test the sensitivity of proposals to changes in

the financial environment

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Net Present Value

• Other options must also be considered
• what else would be done with the money?
• invest the money?
• fund another project?
• acquire new staff, training, equipment, etc?

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DCF Calculations

• Watch out for common mistakes!
• purchase price is paid only once - not every year
• check insurance/maintenance - often a % of the

purchase price (whether renting or buying)

• check how many years required…
• …starting from year 0, not year 1
• you are 0 years old when you are born
• you are in your first year until your birthday…
• then you are 1 year old at the start of your second year

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NPV & DCF Calculations

• Check suggestions for further reading
• Follow worked examples
• Try the tasks

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Any Questions?

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References & further reading

• Burke, R (2003), Project Management: Planning and

Control Techniques, Wiley (or other recent editions)

• Field, M & Keller, L (1998), Project Management,

International Thomson Business Press

• Maylor, H (1999), Project Management (2nd Edition),

Pitman Publishing

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