Topic 4 - Cash Flow and Work Breakdown Structure Item
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Lecture4A-CashFlowandworkbreakdownStructure-Copy1.ppt*
CSCI 714: Software Project Planning and Estimation
Lecture 4A: Cash Flow
Gursimran Singh Walia
North Dakota State University
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PROJECT INITIATION: KEY ACTIVITIES
An opportunity to create or improve the business value from using information technology – Project Identification
The feasibility analysis helps determine whether or not to proceed with the IS project – Feasibility Analysis
Projects are selected based on business needs and projects risks – Project Selection
PROJECT INITIATION: KEY PLAYERS
A key person (or a group of persons) who identifies business values to be gained from using information technology – Project Sponsor
The group of people who reviews system requests from groups throughout the organizations and selects projects for the benefit of the business – Approval Committee
IDENTIFYING PROJECTS WITH BUSINESS VALUE
Business needs should drive projects
Project sponsor recognizes business need for new system and desires to see it implemented.
Business needs determine the system’s functionality (what it will do) – high-level business requirements
The project’s business value should be clear.
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PROJECT IDENTIFICATION: SYSTEM REQUEST
System Request: A document describing business reasons for project and system’s expected value.
Lists project’s key elements
Project sponsor
Business need
Business requirements
Business value
Special issues or constraints
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SYSTEM REQUEST: EXAMPLE
Project sponsor – VP of Marketing
Business need – Reach new customers and improve service to existing customers
Business requirements – Provide web-based shopping capability
Business value - $750,000 in new customer sales; $1.8M in existing customer sales
Special issues or constraints – System must be operational by holiday shopping season
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| Element | Description | Examples |
| Project Sponsor | The person who initiates the project and who serves as the source of contact for the project on the business side | Several members of the finance dept Vice president of marketing IT Manager CIO, or CEO |
| Business Need | The business-related reasons for initiating the system | Increased sales Improved market share Improve access to information Improve customer service Decreased product defects |
| Business Requirements | The business capabilities that the system will provide | Provide online access Include product search capabilities Produce Management reports Include online user support |
| Business Value | The benefits that the system will create for the organization | 3 percent increase in sales 1 percent increase in market share $200,000 cost savings from decreased supply costs $150,000 savings from removal of existing system |
| Special Issues or Constraints | Issues that are relevant to the implementation of the system and committee make decisions about the project | Government-mandated deadline System needed in time for the Christmas holiday season |
EXERCISE 1: DEVELOPING A SYSTEM REQUEST
Think about NDSU and choose an idea that could improve student satisfaction with the course enrollment or course selection process.
HINTS: Currently can students enroll from anywhere? How long does it take? Are directions simple to follow? Is online help available?
Next, think about how technology can help support your idea. Would you need completely new technology? Can the current system be changed?
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FEASIBILITY ANALYSIS
Detailed business case to better understand the opportunities and limitations associated with the proposed project – Feasibility Analysis
Guides the organization in determining whether to proceed with a project
Identifies the important risks associated with the project that must be addressed if the project is approved
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Once the need for the system and the business requirements have been defines, it is time to create a more detailed business case to better understand the opportunities and limitations associated with the proposed project.
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FEASIBILITY ANALYSIS
Most project teams will revisit their feasibility study throughout the SDLC, and
Revisit its contents at various checkpoints during the project
If at any point the project’s risks and limitations outweigh its benefits, the project team may decide to cancel the project, or
Make necessary improvements
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TYPES OF FEASIBILITY ANALYSIS
Technical Feasibility
Economic Feasibility
Organizational Feasibility
Operational
Schedule
Legal and Contractual
Political
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TECHNICAL FEASIBILITY: “Can we build it?”
What are different technical risks?
Users’ and analysts’ familiarity with the application
Familiarity with technology
Have we used it before? How new is it?
Project size
What is your idea of project size?
Why are larger projects more risky?
Compatibility with existing systems
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ECONOMIC L FEASIBILITY: “Should we build it?”
Identify Costs and Benefits, and
Assign values to them
Determine cash flow
Assess financial viability:
Determine Net present Value (NPV)
Determine Return on Investment (ROI)
Calculate Break-Even Point (BEP)
Graph Break-Even Point
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- Development Team salaries
- Consulting fees
- Development Training
- Hardware and Software
- Vendor Installation
- Office Space and Equipment
- Data Conversion Costs
- Software Upgrades
- Software Licensing Fees
- Hardware Repairs
- Hardware Upgrades
- Operational Team Salaries
- Communication Charges
- User Training
- Increased Sales
- Reduction in Staff
- Reduction in Inventory
- Reduction in IT Costs
- Better Supplier prices
- Increased Market Share
- Increase Brand Recognition
- Higher Quality Products
- Improves Customer Service
- Better Supplier Relations
Development Costs
Operational Costs
Tangible Benefits
Intangible Benefits
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Difficult, but essential to estimate
Work with people who are most familiar with the area to develop estimates
Intangibles should also be quantified
If intangibles cannot be quantified, list and include as part of supporting material
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2. Assign Values to Costs and Benefits
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“A formal Cost-Benefit analysis usually contains costs and benefits over a selected number of years to show cash flow over time”
1. Identify Costs and Benefits
2. Assign Values to Costs and Benefits
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2003
2004
2005
2006
2007
Total
6%
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NPV = PV(Benefits) – PV(Costs)
PV = Cash flow amount
(1 + interest rate)n
interest rate = required return
n = number of years in future
3. Determine Cash Flow
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If NPV >= 0,
Project is OK
2003
2004
2005
2006
2007
Total
If NPV < 0,
Project is unacceptable
ROI = Total benefits – Total Costs
Total Costs
3. Determine Cash Flow
4. Determine Net Present Value (NPV),
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ROI = NPV
PV(cash outflows))
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The point in time at which the costs of the project equal the value it has delivered
3. Determine Cash Flow
4. Determine Net Present Value (NPV),
5. Return on Investment (ROI)
6. Break-Even point
ORGANIZATIONAL FEASIBILITY
Strategic alignment
How well do the project goals align with business objectives?
Stakeholder analysis
Project champion(s)
Organizational management
System users
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EXERCISE 2: PERFORMING THE FEASIBILITY ANALYSIS
Consider a project to develop a Web-based information system for providing transfers credit information for all colleges and universities in the world. Is it economically feasible? Perform a cash flow analysis
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SAMPLE SOLUTION
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PROJECT SELECTION
Approval committee works from the system request and the feasibility study
Project portfolio – how does the project fit within the entire portfolio of projects?
Trade-offs must be made to select projects that will form a balanced project portfolio
Viable projects may be rejected or deferred because of project portfolio issues.
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Weighted Scoring Model
- A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria.
- Steps in identifying a weighted scoring model:
Identify criteria important to the project selection process.
Assign weights (percentages) to each criterion so they add up to 100 percent.
Assign scores to each criterion for each project.
Multiply the scores by the weights to get the total weighted scores.
- The higher the weighted score, the better.
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Sample Weighted Scoring Model for Project Selection
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Implementing a Balanced Scorecard
- Drs. Robert Kaplan and David Norton developed this approach to help select and manage projects that align with business strategy.
- A balanced scorecard is a methodology that converts an organization’s value drivers, such as customer service, innovation, operational efficiency, and financial performance, to a series of defined metrics. See www.balancedscorecard.org for more information.
Self- Practice Quiz
- A project manager is managing a software development project for a hospital. There is a new computer available that will speed up the development process considerably. The new computer costs $50,000 including shipping, installation, and start-up. The computer will cause a gross savings of $100,000. What is the net present value of the savings if they occur one year after the expenditure for the computer? Assume a 10% interest rate.
HINT OR
- A project manager is assigned to a project early in the project life cycle. One of the things that must be done is to do a justification for the project. Since very little information is known about the project, the estimates are considered to be rough estimates. The following table is the project manager’s estimate of the cash flows that will take place over the next five years.
- What is the payback period for this project?
- What is the net cash flow at the end of five years?
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ANSWER
- Cumulative cash flow
- Yr 1; -500,000
- Yr2; -290,000
- Yr3; +10,000
- Pay back period between 2 and 3 yrs.
- Net cash flow;
- 850,000 in
- 900,000 out
- Net flow is negative 50,000
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Practice Questions
- The four quantitative factors are: Benefit-Cost Ratio (BCR); Present Value (PV); Net Present Value (NPV); and Payback Period (PP)
- BCR compares benefits to costs and determining BCR=Benefits/Cost. The higher the ratio, then the better the deal is. For example: you have 2 alternatives ways to perform a group of work packages worth of $ 200,000 in progress payments from the client. Using company A will cost $ 50,000, but Company B is willing to do the same work for $ 40,000. Which Company is a better deal based on the BCR.
- Present Value: it is a simple process of calculating the value today of future cash flows. PV= (future value)/(1+i)n = the present value is future value discounted to special interest rate per the time measure. Example: if you have a deal with contractor to give you $ 3,000 today or $3,800 after 3 years. If the interest rate is 10% What is the present value of $3,800? Is the value of $ 3,000 today better or worse than having $ 3,800 after three years?
- NPV: net present value is the real value of cash flow in a project is dependent on the dollar amounts and the timing for both revenue and cost. NPV logic looks at both the inflow and outflow of money over time. NPV= PV revenue – PV costs (both over the flow of time). If you are buying software, then you might make a decision whether to buy from company A or B. Company A asks for $ 8,000 at year o and $1,000 for year 1, 2 & 3. Company B asks for $ 0 at year 0 and $ 4,000 at year 1,2 & 3. Which company would you choose if interest rate is 10% per year?
- Payback Period is approach that calculates how long it will take to earn or save money as much as you have invested. Example, if you invest $ 4,000 in a new equipment, then receive zero benefits at year 1 &2 and then $ 1,000 per year thereafter. What is the payback period?
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- Gradual, progressive increase in the project’s scope that is not noticed immediately
- Occurs when additional requirements result in scope change and can cause cost and schedule overruns
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(Read Definition from slide)
Scope creep occurs when additional requirements, sometimes minor, are identified and added to the project. Overtime, these collectively may result in scope change and cause cost and schedule overruns.
OFTEN DON’T RECOGNIZE IT BECAUSE IT HAPPENS WHEN EVERYONE IS AGREEING!
Delineate between requirements and enhancements. You need buy-in from all of the stakeholders to add enhancements.
Project Management Framework
- Stakeholders: The people involved in or affected by the projects activities. These include the the project sponsor, project team, support staff, customers, users, suppliers and even opponents to the project.
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Project Management Framework
- Knowledge Areas: the NINE key competencies that project managers must develop.
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Project Management Framework
Scope Management: involves defining and managing all the work required to successfully complete the project.
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Scope Management involves managing what?
Project Management Framework
Time Management: includes estimating how long it will take to complete the work, developing an acceptable project schedule, and ensuring timely completion of the project.
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Managing How and When?
Project Management Framework
Cost Management: consists of preparing and managing the budget for the project.
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Managing Who and How much?
Project Management Framework
Quality Management: ensures the project will satisfy the stated or implied needs for which it was undertaken.
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Project Management Framework
HR Management: concerned with making effective use of the people involved with the project.
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Project Management Framework
Comm. Management: involves generating, collecting, disseminating and storing project information.
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Project Management Framework
Risk Management: includes identifying, analyzing and responding to risks related to the project.
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Project Management Framework
Procure. Management: involves acquiring or procuring goods and services that are needed for a project from outside the performing organization.
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Project Management Framework
Project Mgmt. Integration: is an over-arching function that affects and is affected by all of the other knowledge areas. (This is where it is all brought together.)
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Project Management Framework
Tool and Techniques: these assist the project managers and their teams in carrying out the management functions of the 9 Knowledge Areas. Examples of these include WBS Diagrams and Gantt Charts.
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A cash flow analysis is performed using the following assumptions:
The project requires 30 developer weeks to create a de sign based on the SRD
The project requires 120 developer weeks to implement the design.
The project requires 50 developer weeks to test the implementation.
The project requires 50 developer weeks of maintenance yearly.
The project will have a scheduled completion 1 year after the onset.
A developer week is valued at $2,000 of cost to the company.
The project requires $200,000 in new computer hardware to host the system.
The project requires $100,000 to market to customers every year.
The system requires $200,000 to host and run every year which includes bandwidth costs, electricity costs, and
hardware upgrade costs .
The costs to host and run the system will not increase for the first 5 years.
A college or university has on average 2 staff members that handle transfer credit requests.
A staff member at a college or university costs the university $60,000 per year.
The system developed by this project can eliminate the work of one of those staff members.
The system developed by this company will be cost a college or university $30,000.
There are roughly 9,000 colleges and universities in the world.
We can attract 10 customers in the first year after completion of the project.
We can attract 15 new customers each yea r thereafter.
We will not lose a customer for at least 5 years.
Based on those assumptions the following costs are expected:
$400,000 in developer costs to create the project.
$200,000 in initial hardware investments.
$100,000 in developer costs for ye arly maintenance.
$300,000 yearly to market and host the system.
The cash flow analysis for the first 5 years is as follows:
End of Year Cash Flow In Cash Flow Out Net Cash Flow
1 0 600,000 - 600,000
2 300,000 300,000 - 600,000
3 750,000 300,000 - 150,000
4 1,200,000 300,000 750,000
