feasibility study - eng.ppt
TRANSCRIPT
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Project Feasibility Study
Dr. A tt ia H. Gom aa
Head of Industrial Eng. Dept.Fayoum University
2006
mailto:[email protected]:[email protected] -
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Cost
Features
Schedule
QualityStaff
Project Framework
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Pilot runand final tests
New product orservice launch
Final design& process plans
Ideageneration
Feasibilitystudy
Product orservice concept
Performancespecifications
Functionaldesign
Form design
Productiondesign
Revising and testingprototypes
Design
specifications
Manufacturing
or deliveryspecifications
SuppliersR&D
Customers
Marketing Competitors
Project Stages
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Project Stages
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1. Idea Generation - Product Concept2. Feasibility Study- Performance Specifications
3. Preliminary Design - Prototype
4. Final Design- Final Design Specifications
5. Process Planning- Manufacturing Specifications
6. Implementation
7. Operations & Maintenance
8. Project Closeout
Project Stages
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No
Ideageneration
Finaldesign
Preliminarydesign
Feasibilitystudy
Processplanning
Productfeasible?
Yes
Prototype
Manufacturing
Design & ManufacturingSpecifications
The Design Process
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Project Stages (General)
Project execution Design
Implementation
Validation
Conclusion
S0 S1 S3 S4 S5MS MS MS MS MS MS
S2MS MS
Support
Feasibility
studyPrestudy
Definition phase Execution phase
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Start End
Process defined Process ref ined
ImplementationFeasibility
Building consensus and consultation
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Main events
Prestudy Feasibility
Study
S0 S1 S3 S4 S5
MS MS MS MS MS MS MS
S2
Design Implementation
& Verification
Pilot &
ValidationConclusion
Idea is
defined
Main
requirements are
collected.
Project is planned
Resources are allocated
Cost-Benefit-Analysis is made
Product owner exists
Production
is planned
Ready for
piloting
Ready for
release
MS
Conclusion
Ready for
integration
Ready for
system testing
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Different views of requirements
Problem
Features
Needs
System requirements
Software requirements
Solution
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?
PROJECT
begin
ning
en
d
FEASIBILITYSTUDY
YesNo
Reconsider
WHAT IS A FEASIBILITY STUDY?
Feasib i l i ty study is a powerfu l systemat ic
methodology of the feasib i l i ty of a proposedproject , as a basis for decid ing whether i t should
proc eed or otherwise.
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The Feasibility Study
Brainstorming could be used to generatemany ideas for scenarios.
Pre-study:
Scope
Requirements
Targets
Constraints
Feasibility study
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Feasibility Study Factors
Major five factors: Social Technological
Environmental
Economic Political
Hard factors quantities and facts
Soft factors holistic representation
e.g. rich picture
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Feasibility Study
ProjectPlanning
TechnicalStudy
EnvironmentalStudy
Marketing
Study
EconomicalStudy
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Market study:-1
Customers types Customers needs Water quality Quantity rates
Water supply Price rates
2- Technical study: Engineering design
Equipment types International standards Cost estimation
Environmental study:-3
Environmental needs
4- Economical and financialstudy: Economic analysis Sensitivity Analysis Risk analysis
5- Project planning:
Project target plans Improvementsrecommendations
Feasibility study for water station project:
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Feasibility Study
1. Where to start ?
2. What to do ?
3. Who does what ?4. What are the results ?
5. Prototypes
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1. Where to start ?
Before FS Aft er FS
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2. What to do ?
Before FS Aft er FS
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3. Who does what ?
Before FS Aft er FS
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4. What are the results ?
Before FS Af ter FS
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5. Prototypes
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Idea Generation Sources
Companys own R&D
department
Customer complaints
or suggestions Marketing research
Suppliers
Salespersons in thefield
Factory workers
New technologicaldevelopments
Competitors
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Perceptual Maps Visual comparison of
customer perceptions
Benchmarking Comparing product/service
against best-in-class
Reverse engineering
Dismantling competitors product toimprove your own product
Idea Generation Sources (cont.)
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Feasibility studies: Technical feasibility - can we do it? Social feasibility - do we want it?
Economic feasibility - can we afford it? Operational feasibility - can we handle it?
Feasibility studies: are quantitative and qualitative
evaluate costs and benefits are retrospective (historical) and projective (futuristic)
Remember: state assumptions
use graphics visit sites and photograph
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TECHNICAL FEASIBILITY
Can we do this project?
Is the technology available to make it work?
Is it possible to achieve the proposal within the
performance criteria? Are there sufficient skilled technologists
available to staff this project?
Does the technology already exist within the
company so that the proposed tasks are alreadydone and we do not need this project?
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Systems DevelopmentConcepts
Method a prescribed set of tasks that uses specific
techniques and tools to complete a systemsdevelopment activity
Technique a way of doing a particular task in the systems
development process Tool
automated tools to help systems development
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Methodology
a collection of procedures, techniques, toolsand documentation aids which assistsystems developers to implementinformation systems
consists of phases which consist of sub-
phases helps developers plan, manage, control and
evaluate information systems projects
Avison and Fitzgerald (1995)
Systems DevelopmentConcepts
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SOCIAL FEASIBILITY
Do we want this project?
What are the repercussions and impacts onpeople in and outside the company?
Will the proposal influence working practices in afavourable way and improve working conditionsfor employees?
Are there costs to the environment, to society, tocompany culture?
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ECONOMIC FEASIBILITY
Can we afford this project? How much will this project cost financially? Do the benefits balance the capital outlay? Over what period will we pay back that outlay
and make a profit? We would estimate the financial cost, consider
the benefits, and analyse the balance in acost/benefit analysis using tried and testedaccountancy methods.
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OPERATIONAL FEASIBILITY
Can we handle the outcome of this project? Will the company cope with resulting change? Do we have or will we be able to obtain the
resources to make the end-product worthwhile inthe future?
Or is the company content with the currentposition?
Will the company be able to retrain/redistributeexisting staff or recruit additional personnel?
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Cost Estimation
Cost)l(HistoricaCostFuture f
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The Cost Estimating Process
Definition &
Planning
Data
Collection
Estimate
Formation
Review &
Presentation
Final
Document
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Make-or-Buy Decision
Alternatives Differential
Make Buy Cost to Make
Rental of equip. $15,000 ---- $15,000
Direct materials 5,000 ---- 5,000
Direct labor 24,000 ---- 24,000
Variable overhead 9,000 ---- 9,000
Purchase cost $66,000 ($66,000)
Relevant costs $53,000 $66,000 ($13,000)====== ====== ======
Decision: Manufacture parts in-house
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Keep-or-Drop
Differential
Keep Drop Amount to Keep
Sales $150,000 ---- $150,000
Variable expenses (67,500) ---- (67,500)
Contribution margin $ 82,500 ---- $ 82,500
Direct fixed expenses (85,000) ---- (85,000)
Relevant benefit/loss $ (2,500)======
Decision: Drop the Deluxe product line but investigate alternative
use of facilities. This analysis provides a benchmark for future
decisions.
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Special-Order DecisionsAssume the following price quotation sheet for the XYX Company who
has received an offer buy at $38 per unit.
Direct materials $12
Direct labor 14
Variable overhead 4
Variable selling and administrative 2
Fixed manufacturing 20
Total $52
Markup--50% 26
Target selling price $78
===
Important: XYZ Company has idle capacity and can produce the
special order without affecting its current production.
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Economic Feasibility Study
WIP/DIP
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Cost AnalysisExample
Capital Costs Vendor 1 Vendor 2
Application Software Licensing $ 2,099,522 $ 1,007,551
Interface Development 135,000 20,000
Vendor Services 398,400 159,310
System/OS and Hardware Costs 1,206,362 1,411,757
Capital Costs Subtotal $ 3,839,284 $ 2,598,618
5-Year Operating Expenses
Application Software $ 1,889,930 $ 1,019,073
Interfaces 111,600 23,852
System/OS and Hardware Costs 260,091 286,551
Operating Expenses Subtotal $ 2,261,621 $ 1,329,476
TOTAL 5-YEAR COSTS $ 6,100,905 $ 3,928,094
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ResultsCase Study
Year 1 Year 2 Year 3 Year 4
Cost $1,000,000 $200,000 $200,000 $200,000
Benefit 100,000 150,000 250,000 350,000
Difference $(900,000) $(50,000) $ 50,000 $150,000
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Net Present Value Example
Net Cash NPV of Net
Year 10% Col. Inflows Cash Inflows
1 0.909 $125,000 $113,6252 0.826 130,000 107,380
3 0.751 115,000 86,365
Total PV of net cash inflows $307,370Net initial investment 250,000
Net present value of project $ 57,370
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Net Present Value Example
The company is considering another investment.
Initial investment is $245,000.
Investment in working capital is $5,000.
Working capital will be recovered.
Useful life is three years.
Estimated residual value is $4,000.Net cash savings is $80,000 per year.
Expected return is 10%.
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FOR WHAT IS A FEASIBILITY STUDY USED?
Feasibility studies may be used for a variety of purposes, such as:
testing and comparing the viability of proposals
approaching financial institutions for project funding
examining the original brief in detail, prompting discussions of client objectives and thecost implications of various project options, as well as uncovering conflicts and issues sothat they may be resolved.
return on investment > return on alternative investments
revenues > mortgage payments + operation costs
E i F ibilit
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Economic FeasibilityShouldWe Build It?
Identify costs and benefits
Assign values to costs and benefits
Determine cash flow Assess financial viability
Net present value (NPV)
Return on investment (ROI) Break even point (BEP)
ECONOMIC FEASIB IL ITY
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ECONOMIC FEASIB IL ITY
Example
Costs to develop , maintain and operate
Benef i ts when operat ional
Break-Even po int (Cos ts = Benefi ts)
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HOW IS PROJECT FEASIBILITY ASSESSED?
1.Identify project costs and benefits
2. Make assumptions about the project and future economic conditions
Costs:
Land
Consultants
Construction
Environmental, social,cultural, political
Risk
Interest on capitalexpenditure
Benefits:
Superior design outcomes
Creation of magnet
Socio-cultural diversity
Eco-solution
Social or cultural capital
Higher return on investment
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Expected Value
Costs Benefits
Tangible
Intangible
***
*
**
***
*
**
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Assign Cost and Benefit Values
Difficult, but essential to estimate
Work with people who are most familiarwith 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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Profit
The purpose of Product Development is to produce a goodor service that a customer will pay a sufficient price for toassure a profit.
Gross Profit=Price - Direct Cost Net Profit= Gross profit - allocated expenses
To assure a profit, companies act to produce products thatcan command the highest prices and cost the least to make
Any exceptions?
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What other product issues drive companiesbesides profits?
Valuation
Future earnings
Products in the pipeline
Acquisition potential Strategic fit of products with another company
Previous sales of equivalent company (comparables)
Break-up potential Value of a conglomerate as the sum of its parts
Tax consequences
Etc.
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Cash Flow
Required for business continuity
To pay expenses
To pay interest on debt
To pay dividends to stockholders To grow business
To invest in new programs, technologies
Equipment
Inventory and Receivables
Acquisitions etc. Best measure of financial performance
Used by Wall Street
What other product issues drive companiesbesides profits?
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What other product issues drive companiesbesides profits?
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Investment Alternatives
The object is to take capital earned, borrowedor from investors and allocate it in a fashionthat earns the highest return for theshareholders of the company.
There needs to be an appropriate balance oflong and short term returns.
More complex and as simple as a matter ofdollars and cents.
Question:
What are some investment alternatives for a company?
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What are typical investment alternatives. . .
Invest in
product line aor product line b
Advertising
Information Systems
A new factory Buy-back companies stock
Acquisition
Employee bonus or salary raise
Hire more HR personnel
etc.,etc.
The Cri ter ia is:
Which investment(s) gives the highest return?
Determine Cash Flow:
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Determine Cash Flow:Assign Values to Costs and Benefits
Simple Cash Flow Method
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Assess Financial ViabilityNet Presen t Value
NPV = PV(future cash inflows)
PV(future cash outflows)
PV = Cash flow amount(1 + interest rate)n , where
interest rate = required return
n = number of years in future
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Assess Financial ViabilityReturn on Investment
ROI = NPV
PV(cash outflows)
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Cash Flow Method for Cost Benefit Analysis
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Total (benefits - costs)
Return on Investment Calculation
Total costs
RETURN ON INVESTMENT EQUALS
Divided by
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Net Present Value Calculation
(1 + interest rate)n
Some amount of money
NET PRESENT VALUE EQUALS
Divided by
Where n equals the number of periods
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Net Present Value of an Investment
Holds for all investments
Takes into account inflation, cost ofcapital, corporate expectations of return
Reduces all times to a common point
C f
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Calculation of Net Present Value
n
t
t
t
k
ANPV
0 1
Where k is the expected rate of return
A sub t is the cash flow in the period t
Choose the programs whose NPV ishighest consistent with strategy, r isk,
resource, etc.
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Calculation of Payback Period
0
10
n
tt
t
r
A
Where r = discount rate
is the cash flow in period t
tA
tA
tA
Preparing an economic
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Preparing an economicfeasibility study
Compare product Returns on Investmentexample: Sample business plan pro forma
Dollars
Time
(Years)
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To calculate NPV, first assume a cash flow
-4000
-2000
0
2000
4000
6000
8000
10000
1 2 3 4 5 6 7 8 9 10 11 12
Time (Years)
Cash
Flow
C l l ti f NPV d P b k P i d f
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Calculation of NPV and Payback Period of aninvestment
Year Cash Discounted Cash Flow Discount rate
1 -1000 (909)$ (909)$ 10%2 -2000 (1,653)$ (2,562)$
3 -3000 (2,254)$ (4,816)$
4 -1000 (683)$ (5,499)$
5 0 -$ (5,499)$
6 1000 564$ (4,934)$
7 2000 1,026$ (3,908)$
8 6000 2,799$ (1,109)$
9 10000 4,241$ 3,132$
10 5000 1,928$ 5,060$
11 2000 701$ 5,761$
12 2000 637$ 6,398$
Net Present Value= 6,398$
Payback 9 years
Assume all cash is spent at end of perid
-$
Calculation of NPV and Payback Period of an
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Calculation of NPV and Payback Period of aninvestment
Year Cash Discounted Cash Flow Discount rate
1 -1000 (769)$ (769)$ 30%2 -2000 (1,183)$ (1,953)$
3 -3000 (1,365)$ (3,318)$
4 -1000 (350)$ (3,668)$
5 0 -$ (3,668)$
6 1000 207$ (3,461)$7 2000 319$ (3,142)$
8 6000 736$ (2,407)$
9 10000 943$ (1,464)$
10 5000 363$ (1,101)$
11 2000 112$ (990)$
12 2000 86$ (904)$
Net Present Value= (904)$
Payback never breaks even
Assume all cash is spent at end of period
Calculation of Internal Rate of Return (IRR) for
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Calculation of Internal Rate of Return (IRR) fora project
Calculate a discount rate (k) that reducesthe NPV of a project to zero
n
t
t
t
k
ANPV
0 10
C l l ti f I t l R t f R t IRR) f
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Calculation of Internal Rate of Return IRR) of aninvestment
-1000
-500
0
500
1000
1500
20 21 22 23 24 25 26 27 28 29
NPV($) Vs
Discount Rate
(%)
IRR=24.3%
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Value analysis (VA)
Can we do without it? Does it do more than is required?
Does it cost more than it is worth?
Can something else do a better job?
Can it be made by a less costly method?
with less costly tooling?
with less costly material?
Can it be made cheaper, better, or faster bysomeone else?
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Sensitivity Analysis
Reduce (Increase) Price
Change Product Development Time
Consider competitive response
Some thoughts on how to increasefit
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profitsP=SP-C
1. Increase Selling PriceIncrease Customer Value Put extra features in product which require little marginal cost
Provide extra service
Target less competitive segment of the market
Get to market before competition Price at the maximum the customer is willing to pay
Pr ice models should ref lect cu stomer value- not cos t
(except in g overnment con tracts i f yo u w ish to avoid jai l
Note in English gardening magazine: Even though seed sales are
at an all time high, the price is not expected to come down
Some thoughts on how to increaseprofits
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Why?
profitsP=SP-C
2. Decrease Selling Price
Some thoughts on how to increase profitsP=SP C
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Do it right the first time Dont commit to detailed design until you have customers specs firm
then dont change
Build a manufacturable product. Bring manufacturing in early
Dont overload with features that the customer doesnt want that are
costly to develop Manage tightly to schedule with appropriate risk and risk reduction
plans
Use rigid phase exit criteria
All of these consistent with Fast C/T
P=SP-C3. Decrease Product Development (NRE) and
Manufacturing (RE) costs
ome oug s on ow o ncreaseprofits
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Effect on product price in being first tomarket?
Effect on total revenue of turning outproducts faster?
Effect on Cost?
profitsP=SP-C
4. Decrease Cycle Time for product Development
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P tf li A l i
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Portfolio Analysis
Reward
(NPV)
Risk
Game Changers
KillBread and Butter
Pearls
A Portfolio of 6 programs
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D
C
B
A
Reward
(NPV)
Risk
Kill
GameChangers
Bread and Butter
Pearls
A Portfolio of 6 programs
G
F
Note: area = program cost
H d ll t ?
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How do you allocate?
Not by NPV and Payback Period alone
But. . .
Portfolio Balance (long/short)
Strategically Important vs Tactically Important
Product Families and Platforms
Future Sales Model
Available Resource
People and Dollars Customers demands
D t f R k d d Li t
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Data for Rank ordered List
Project Name IRR NPV Strategic
Importance
Probability of
Technical Success
Alpha 20% 10.0 5 80%
Beta 15% 2.0 2 70%
Gamma 10% 5.0 3 90%
Delta 17% 12.0 2 65%
Epsilon 12% 20.0 4 90%
Omega 22% 6.0 1 85%
Rank Ordered by discounting
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Rank Ordered by discountingreturns by probability of success
Project Name IRR NPV Strategic
Importance
Ranking Score
Alpha 16.0 (2) 8.0 (2) 5 (1) 1.67 (1)
Epsilon 10.8 (4) 18.0 (1) 4 (2) 2.33 (2)
Delta 11 (3) 7.8 (3) 2 (4) 3.33 (3)
Omega 18.7 (1) 5.1 (4) 1 (6) 3.67 (4)
Gamma 9.0 (6) 4.5 (5) 3 (3) 4.67 (5)
Beta 10.5 (5) 1.4 (6) 2 (4) 5.0 (6)
Whatever the methodology, the
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gy,choices you make have an Opportunity
Cost
Program Development Resource is alwaysfinite
Most companies with good engineering and
marketing resource are in a target richenvironment How expensive is it to develop the
Technology vs other choices?
Consider, allocation is a zero sum game. An investment that ties up resource- even agood investment (High NPV) can crowd outa better (sometimes much better) investment
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R t I t t
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Return on Investment Return on Investment (RoI)
RoI is the simplest, and one of the most frequently used, measures offinancial feasibility. It delivers a percentage figure that can becompared against prevailing interest rates, in order to assess whetherthe proposed investment is financially worthwhile.
The basic formula is:
RoI = (Net Benefit / Investment) x 100 Where Net Benefit = the sum of tangible benefits Total costs,
including annual running and development costs.
Standards vary from organisation to organisation as to what period thecosts and benefits are measured. A common standard is to use the
sums of annual costs and benefits over a four-year period; another is touse the costs and benefits over the expected life of the solution.
Standards also vary as to what RoI rate is acceptable, with values suchas twice bank base rate, or base rate plus 5% being fairly typical.
P b k P i d
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Payback Period
Payback Period Another common measure is that of Payback Period. This is a measure
of when sufficient benefits will have accrued to cover both the initialinvestment costs and the on-going running costs of the solution.
For example a project with an investment cost of 120,000, annualrunning costs of 20,000, and annual benefits of 50,000 will pay back
the investment in 4 years.
In assessing overall cost benefit, measures such as RoI and PaybackPeriod will frequently be used in combination, and viewed differently bydifferent organisations.
For example some might view a RoI of 20% with a pack back of 2 years
as preferable to a RoI of 30% with a Payback Period of 4 years,depending on their strategic aims and current financial position.
For a full description of these methods the reader is referred to a text such as Robson (1997).
1. Systems Development Costs (one-time; representative only)
Personnel:
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Personnel: 2 Systems Analysts (450 hours/each @ $45/hour) $40,500 5 Software Developers (275 hours/each @ $36/hour) 49,500 1 Data Communications Specialist (60 hours @ $40/hour) 2,400
1 Database Administrator (30 hours @ $42/hour) 1,260 2 Technical Writers (120 hours/each @ $25/hour) 6,000 1 Secretary (160 hours @ $15/hour) 2,400 2 Data Entry clerks during conversion (40 hrs/ea @ $12/hr) 960
Training: 3 day in-house course for developers 7,000
User 3 day in-house course for 30 users 10,000
Supplies: Duplication 500 Disks, tapes, paper, etc. 650
Purchased Hardware & Software: Windows for 20 workstations 1,000 Memory upgrades in 20 workstations 8,000 Mouse for 20 workstations 2,500 Network Software 15,000 Office Productivity Software for 20 workstations 20,000
TOTAL SYSTEMS DEVELOPMENT COSTS: $161,670
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2. Annual Operating Costs (on-going each year)
Personnel: Maintenance Programmer/Analyst (250 hrs/year @ $42/hr) $10,500 Network Supervisor (300 hrs/year @ $50/hr) 15,000
Purchased Hardware & Software Upgrades: Hardware 5,000 Software 6,000
Supplies and Miscellaneous items 3,500
TOTAL ANNUAL OPERATING COSTS: 40,000
-----------------------------------------------------------------------------------------------------------
TOTAL COST TO DEVELOP AND OPERATE THE SYSTEM: $201,670==========
TANGIBLE BENEFITS
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Fewer processing errors
Increased throughput
Increased response time
Elimination of job steps
Reduced expenses
Increased sales
Faster turnaround
Better credit
Reduced credit losses
Reduction of accounts receivables
TANGIBLE BENEFITS
Equate these
to Do llars ($)
INTANGIBLE BENEFITS
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Improved customer goodwill
Improved employee morale
Improved employee job satisfaction
Better service to the community
Better decision making
INTANGIBLE BENEFITS
Equate these
to Dollars ($)
BREAK EVEN (PAYBACK) ANALYSIS
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Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Development Costs (161,670) - - - - -
Operational Costs - (40,000) (40,000) (40,000) (40,000) (40,000)
Tangible Benefits - 50,000 55,000 60,000 65,000 70,000
Intangible Benefits - 20,000 25,000 30,000 35,000 40,000
Benefit (Cost) (161,670) 30,000 40,000 50,000 60,000 70,000
Cum Benefit (Cost) (161,670) (131,670) (91,670) (41,670) 18,330 88,330
* This simple example does not consider the Time-Value of Money
Break Even (Payback) Analys is Exam ple*
Cum Benefit (Cost)
(161,670)(131,670)
(91,670)
(41,670)
18,33088,330
(200,000)
(150,000)
(100,000)
(50,000)
-
50,000
100,000
150,000
0 1 2 3 4 5
Cum Benefit
(Cost)
Pump Replacement
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Assumptions/Calculations: The ideal pump produces 0.5HP as determined by our calculations
Calculations were based on an ideal impeller pump
Average Annual Costs are constant
Pump Maintenance Technicians cost $18 per hour
Interest rate is 4%
Centrifugal Pump maintenance is a percentage of the initial costplus the cost of a Maintenance Technician
Pump Replacement
Axial Pump
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Axial Pump
Model: 607-3
Initial Cost: $4400
Maintenance /
year: 6 to 10 hrs labor
Pump
MaintenanceTechnician: $18 per hr
Total Yearly
Cost: $100
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Diaphragm Pump
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Diaphragm Pump
Model: LLC-1010
Initial Cost: $2399
Maintenance /
(9/12) Year $284 Repair Kit
$100 Technician
Total
Maint/Year $512
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Our Decision
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Our Decision
Carry Manufacturings Axial Flow Pump(Model 607-3) is the most cost effectivemodel for our application.
This holds true even when: APR = 6%
APR = 2%
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Organizational Feasibility
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If we build it, will they come?
Strategic alignment How well do the project goals align with
business objectives?
Stakeholder analysis Project champion(s)
Organizational management
System users
ETHICAL CONSIDERATIONS
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How do you identify all those who are or may be affected by the project?
Who is the client?
How do you evaluate community impact (cost and/or benefit)?
What effects will the new project pose to the environment?
What is the most appropriate land use? The most efficient use of materials,of energy?
Goals and success criteria of project
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management
The project is on time
The project is run in cost-effective manner
The resources are used efficiently
Project outcome is verified and ready for validation
Customeris satisfied with the project and its
outcome
Project team members are satisfied with the project
and its outcome
Project management - needed knowledge
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j g g scope management
time management
cost management
quality management
resource management
integration management
communication management
risk management
subcontracting management
problem management processes and work methods
leadership skills
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Thank you foryour attention !