project mgmt theory

8/12/2019 Project Mgmt Theory

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Section 1 - PROJECT ANALYSIS:

1 What is Project Appraisal? Explain various types of Appraisal Criteria

used before execution of a project.

2011 !"# 200$ 10"#

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Project appraisalis a %eneric ter& that refers to the process of assessin%# in a structured 'ay#

the case for proceedin% 'ith a project or proposal. (n short# project appraisal is the effort of

calculatin% a project)s viability. (t often involves co&parin% various options# usin% econo&ic

appraisal or so&e other decision analysis techni*ue

Process

(nitial Assess&ent

+efine proble& and lon%,list

Consult and short,list

+evelop options

Co&pare and select Project

Project appraisal is an appraisal of project objective# project desi%n# project finance# Econo&ic#-echnical and Co&&ercial feasibility and projects cost# benefit and profit.

(t is a co&plete and syste&atic revie' of all aspects of a project. (t is a second loo/ at theproject feasibility report by a person other than one 'ho is associated 'ith its concepts and

preparations.

PROJECT ANALYSIS AND APPRAISALI. MARKET ANALYSIS

First Step in project analysis or appraisal.

What is the potential size of the market?What share of the market can you capture?

Market analysis would involve:Preliminary nalysis and !efinin" o#jectives$ollection of secondary data usually from desk research

Market survey % Field Survey$haracterization of the marketForecastin" !emand & Supply and assessin" the "apPreparin" a complete market plan

a. PE((3A4 A3A45(5 6 +E7(3(38 9:;EC-(


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Product characteristics % usa"e % applications 'Who are the #uyers?(

ppro)imate Market size and characteristics '*)istin" Mfrs.+ Sales in the

past+ etc.(.

Market se"ments 'diff. ratin"s & types( & "eo"raphic distri#ution

Pricin"+ packa"in"+ ,uality aspects+ -uarantee % Warrantee+ distri#ution

channels+ etc.

b. C9EC-(38 5EC93+A4 +A-ASecondary data provides a startin" point or a #ase for market analysis.

asically refers to desk research.

vaila#le pu#lished information

/nternet is a powerful tool 0 we#sites of concerned associations+

manufacturers+ dealers+ -overnment "encies+ 1e"ulatory uthorities+ etc.provide "ood amount of secondary data.

=5E7= 59=CE5 97 5EC93+A4 +A-A>

Government o In!i" Re#ort$ % P&'(ic"tion$: Five 2ear Plans+ $ensus report+ *conomic Survey+ Statistical 2ear ook'34(+ -uidelines to /ndustries+ nnual Survey of /ndustries '$S5(+ 6echno7*conomic Surveys '4$*1(+ /ndustrial Potential Studies+ Monthly ulletins of1/+ 1eports of *)port Promotion $ouncils+ 6! and State 6radin" corporation+/mport7*)port Statistics+ etc.

N"tion"( ) Intern"tion"( event$ ) e*+i'ition$:

8ust as these help companies to reach out to a wider audience+ they alsohelp the audience to "et more information on products & technolo"ydevelopments in the areas of interest

In!&$tr, S#eciic Re#ort$:nnual pu#lications % reports of 9arious /ndustry ssociations e.". /M'utomo#ile(+ /*M '*lectrical(+ $M '$ement(+ /-MF '-lass(+ /ndian Machine6ool Manufacturers ssociation+ etc./ndustrial or usiness Ma"azines e.". *F2+ *lectronics 6oday+ $omputer !i"est+Metal ulletin+ Minerals and Metals 1eview+ /ndian 6e)tile ulletin+ 1u##er /ndia+Packa"in" /ndia+ usiness /ndia+ etc./nformation providin" "encies e.". $M/*+ /S/ *mer"in" Markets+ loom#er"+etc.

5ther sources e.". Stock *)chan"e !irectory+ other directories+ usinessdailies+ etc.

c. C93+=C-(38 A AE- 5=


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(&portant steps for conductin% a successful &ar/et survey

Define Target Population

$hoose Samplin" plan & Sample Size.

Prepare a uestionnaire+ test market it #y conductin" a pilot survey.

1ecruitin" and trainin" of field investi"ators.

$ollect information throu"h uestionnaires

Scrutinize the information and eliminate the information that is suspect.

$ollate+ analyze and interpret the information % data to draw appropriate

conclusions.

Pro#lems faced in a market survey could #e many in a country like /ndia due tohetero"eneity of the county+ multiple lan"ua"es and scalin" techniues used inuestionnaires

AE- 5=


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S$5P*: -ap in the demand for and supply of chosen product or services+>ikely share of the market that one can e)pect to achieve. 1ecommendedmarketin" strate"y.

-59*14M*46 P5>/$2: $an chan"e the total perspective % picture completely

= $ontrols on trade+ ta)es+ duties+ su#sidies+ etc.

79ECA5-(38 +EA3+DI//ERENT MET0ODS OR TEC0NIES SED:&"(it"tive Met+o!$:

= !elphi method : 5pinions of mana"ers in the field sou"ht throu"h auestionnaire and summary of consolidated findin"s prepared and sent tothem a"ain and a"ain till reasona#le a"reement emer"es.= 8ury of e)ecutive method: 5pinions of a "roup of successful mana"erssou"ht on likely sales in the future and these fi"ures are then simplyconsolidated+

79ECA5-(38 +EA3+Time Serie$ Pro2ection Met+o!$:

= Tren! #ro2ection met+o!:i. First a trend is determined #y esta#lishin" a relationship #etween demandand supply #ased on past consumption statisticsii. 4e)t+ this euation % relationship is used to e)trapolate the trend andestimate the demand for the future.

79ECA5-(38 E-@9+59eadin" /ndicator Method= $hain 1atio Method= *conometric Method

.B. C9:(3A-(93 97 E-@9+5

For instance+ 1atio method and econometric method could #e usedsimultaneously to estimate the demand for electronic % di"ital type of meters.

II -TEC0NICAL APPRAISAL % ANALYSIS

$omes under the domain of technical or en"ineerin" e)perts.asically involves technical appraisal of "iven project.

:A5(C PAAE-E5a. Plant capacity#. Product Mi)c. Manufacturin" Process % 6echnolo"yd. 6echnical arran"ementse. Materials and inputsf. >ocation and site.


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". *nvironmental aspectsh. $ivil works and structuresi. Machinery and *uipment

j. Plant layout & project chartsk. Project implementation schedulel. $onsiderin" alternatives.

a. PA3- CAPAC(-4Plant capacity has to #e decided only after careful consideration of followin" aspects:

*conomies of scale % 6echnolo"y reuirement 'luminum smelter or cement

plant(

/nput constraints

/nvestment costs: $@A $B',@%,B(C

Market Potential

1esources at the disposal of the firm

-overnment Policy

b. P9+=C- (

/s "uided #y market forces

Should #e aimed at ma)imizin" the profits e.". soap manufacturin".

Production facilities should #e planned to allow fle)i#ility in product mi) to

adjust to chan"in" market conditions. ppropriate trade off #etweenadditional investment and fle)i#ility in product mi) is necessary.

c. A3=7AC-=(38 P9CE55 D -EC@39984For many products+ two or three alternative processes are availa#le:

!M6 versus P6 route for the manufacture of polyester or P*6 is a well

known controversy. Steel: last furnace+ *lectric rc Furnace 1oute

!ry process versus wet process for portland cement manufacturin".

Solvent e)traction plants could use #atch process or continuous process+

1efinin" could #e mechanical refinin" or chemical refinin".

io7diesel could #e produced from ve"eta#le edi#le or non7edi#le oils

C@9(CE 97 -EC@39984$hoice of technolo"y is "overned #y:

o Plant capacity 'at least DEE 6P! for cement plant usin" rotary kiln

otherwise vertical shaft technolo"y(

o Major inputso Project cost and cost of production

o Successful use #y other units

o Product mi) includin" #yproducts

o >atest developments

o *asy adapta#ility

o *co7friendly?

o ppropriate 6echnolo"y for local conditions


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d. -EC@3(CA AA38EE3-5

ppropriate arran"ements for technical know how for the manufacturin"

process are pre7reuisites for a successful operation.

6echnical colla#oration+ if necessary+ should consider:

Project and process desi"nin"+ technical inputs+ selection of euipment+

installation+ commissionin"+ maintenance contract+ trainin" of personnel+ etc.

Period of colla#oration+

6erms and conditions of colla#oration viz. lumpsum payment+ licensin" fee

and % or royalty+

Tec+nic"( co(("'or"tion3 i nece$$"r,3 $+o&(! con$i!er:

o Process and performance "uarantees wrt capacity+ process

parameters+ consumption of raw materials+ utilities+ etc. 0 penaltyclauses

o clause for continuous updatin" of know7how+ #enefits of 1 & !

work+3se of #rand names+ e)port assistance or restrictions if any+o Participation in euity+

o ssi"nment of responsi#ilities in case of chan"e of ownership+

o 6ermination of a"reement and dispute mechanism+

o $lauses applica#le in case of force majeure

e. A-E(A5 A3+ (3P=-5dvance and meticulous plannin" is reuired for procurement of ri"ht uality %

specifications & uantities of:

1aw materials '"ricultural+ Marine+ Mineral+ >ivestock+ Forest Products+ etc.(

3tilities

Processed industrial materials+ components+ u)iliary materials % consuma#les and factory supplies+ etc.

f. 9CA-(93 A3+ 5(-E

Pro)imity to suppliers of raw materials and markets

Pro)imity to ancillary units

vaila#ility of /nfrastructure

>a#or situation

-overnment policies and incentives

5ther factors

%. C(


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h. PA3- A3+ AC@(3E4 6 E=(PE3-

$hoice depends on the technolo"y used and the desi"ned capacity of the

plant.

$apacities of different sections should match '!etailed calculations are

reuired to decide on confi"urations of machinery % process euipment+estimate of likely levels of production+ type of machine operations+ productionhours reuired for each operation and hence machine+ num#er of machinesreuired and provision for emer"encies+ etc.(.

*uipment could #e of different types: Process+ mechanical+ electrical+

instrumentation & process control euipment+ internal transportation 'cranes+lift trucks+ etc.(

>ist of maintenance euipment+ uality control la#oratory+ spare parts and

tools reuired.

$onstraints on selection of plant and machinery 'availa#ility of power+ lar"e

size euipment and hence difficulty in transportation+ shorta"e of skilled la#or+etc.(

$oordination for procurement of plant and machinery: !ifferent items from

different suppliers+ 6urn7key project v%s in7house responsi#ility of packa"edcontracts+

Factors to #e considered while makin" a choice of supplier%s 'reputation+

uality+ delivery schedules+ terms of payment+ Performance -uarantees'mechanical+ input and output(+ and rewards or penalties related to period ofcompletion.

i. PA3- A49=- A3+ P9;EC- C@A-5

Functional >ayout

Plant >ayout 'smooth flow of raw materials+ proper utilization of space+

provision for e)pansion+ safety of personnel+ minimizin" movements andhence production costs(

Flow process chart and Material Flow !ia"ram 'ideally+ #alance of material at

every sta"e should also #e mentioned(.

Production >ine !ia"ram

3tility >ine !ia"rams and $onsumption >ayout+

6ransport >ayout

$ommunication >ayout

5r"anization $hart

j. E3


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step in the ri"ht direction.

>eather+ paper+ te)tiles+ cement+ steel+ coal #ased thermal power stations+

"ranite processin" facilities and chemical industries must plan forenvironmental measures well in advance.

/. P9;EC- (PEE3-A-(93 5C@E+=E.

For smaller projects+ a simple #ar chart showin" different activities and timin"

is adeuate.

Work Schedule: !etailed work plan of at least initial activities is however

desira#le.

For comple) projects+ it is necessary to prepare P*16 % $PM charts. Financial

/nstitutions now a days insist on network techniues to know the schedule ofimplementation. 6he topic is separately dealt with in "reat details.

l. C95(+E(38 A-E3A-(1" Whether &eans of financin% are ade*uately tied up and assured.2" Whether the structurin% of the capital of the project is done in such a 'ay thatacceptable debt> e*uity nor& is used.-he project should have capacity to %enerate revenues and not cash flo' suchthat debt is serviced.G" Whether cash flo's are esti&ated 'ith reasonable underlyin% a assu&ptions.H" Applyin% the brea/,even point and studyin% &ar%in of safety.

I" E&ployin% discountin% criteria for acceptability of the project.a" 3P< criterionb" :enefit cost ratioc" (nternal rate of return.

B" =se of non , discountin% criteria >a" Paybac/ periodb" Accountin% periodc" =r%ency


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V. APPRAISAL TECHNI!ES "THER THAN FINANCIAL

#. $anage%ent an& "rgani'ational AppraisalJ 3ot *uantifiable# but relies on jud%&ent.J Evaluation of technical and &ana%erial co&petence# /no'led%e of the project#inte%rity and past records.

J +o the pro&oters have ade*uate financial resources for the project ?J +o the pro&oters D co&pany envisa%e and plan an or%aniKational structuresuitable for the proper &ana%e&ent of the project durin% operational phase ?

J (nfor&ation re*uired for &ana%erial appraisal 'ill be throu%h analysis of financialposition of existin% business co&pany D associate D sister co&panies D :an/ers)report etc. fro& credit)s an%le"

J Perfor&ance and %ro'th records of associated co&panies 'ith 'hich pro&otersare connected. (t sho's entrepreneurial and &ana%erial capability of pro&oters.

(. Econo%ic Appraisal(t involves the follo'in% *uestions >

J Would the project contributed any sector)s develop&ent si%nificantly ?J Would the project contribute to the industrial develop&ent of the concerned

re%ion ?J Whether project outlay 'ill i&prove the socio , econo&ic status of people# byprovidin% jobs.

J +oes project have a favourable i&pact on export pro&otion# i&port substitutionand :9P status ?5o&e of the &easures used to evaluate econo&ic viability are as follo's >1" Econo&ic ate of eturn E"2" +o&estic esource Cost +C"G" Effective ate of Production EP"H" (nvest&ent of E&ploy&ent atio (E"

). En*iron%ental Anal+sis

-he %ro'in% concern of environ&ent# resource depletion and pollution have forced theplanners# policy &a/ers to ta/e care of i&pacts of the project on environ&ent >-he appraisal therefore evaluates project i&pact on >1" Air2" WaterG" onu&ental resourcesH" andI" 5oundB" @u&an inhabitation nearbyL" Ani&als and :irds

-he appraisal often relies upon environ&ental i&pact assess&ent E(A" conducted by

independent body 5uch studies are conducted to reveal 'hether there is any i&pact ofproject in a lon% run on environ&ent (f it is revealed that there 'ill be no har&ful chan%ein various social econo&ic and physical attributes of environ&ent of the project then theproject 'ill be considered favourably.


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Section ( , Project Selection

1 Explain the various &ethods that financial institutions use to calculate cost of

capital.

2011

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-he cost of capital is a central concept in financial &ana%e&ent. (t is used for evaluatin%

invest&ent projects# for deter&inin% the capital structure# for assessin% leasin% proposals# for

settin% the rates that re%ulated or%aniKations li/e electric utilities can char%ed to their

custo&ers# so on and so forth.

A fir&s cost of capital is the 'ei%hted avera%e cost of various sources of finance used by it# viK#

e*uity# preference and debt.

#. Cost of De-t

-he cost of debt instru&ent is the yield to &aturity of that instru&ent

-he cost of debt !" can be calculated as the 'ei%hted avera%e of the effective cost ofthe various loan facilities used by the co&pany on 'hich interest is explicitly char%ed net,offafter tax rate t".

(. Cost of Preference capital

Preference capital carries a fixed rate of dividend and is redee&able in nature.

). Cost of Euit+ capital

a. CAP$

We assu&e that the cost of e*uity can be esti&ated usin% the standard CAP capital

asset pricin% &odel">

(n the e*uation# the excess return for the stoc/ &ar/et is &easured by the expression

# in 'hich rmis the return for a %eneral stoc/ exchan%e index calculated over a lon%

period and ris the ris/,free rate for %overn&ent securities. 4represents the stoc/ ris/.

-. Di*i&en& /ro0t1 $o&el Approac1

A &odel for deter&inin% the intrinsic value of a stoc/# based on a future series ofdividends that %ro' at a constant rate. 8iven a dividend per share that is payable in oneyear# and the assu&ption that the dividend %ro's at a constant rate in perpetuity# the&odel solves for the present value of the infinite series of future dividends.


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Where>

+ M Expected dividend per share one year fro& no'

/ M e*uired rate of return for e*uity investor

8 M 8ro'th rate in dividends in perpetuity"

c. 2on& 3iel& Plus Ris4 Pre%iu% Approac1

-his is subjective procedure to esti&ate the cost of e*uity 'hereby the jud%&ental ris/

pre&iu& is added to the observed yield on the lon% ther& bonds of the fir& to %et thecost of e*uity>

Cost of e*uity M 4ield on lon% ter& bonds N is/ Pre&iu&

What it &eans is that fir&s that have ris/y and conse*uently hi%h cost debt 'ill alsohave ris/y and conse*uently hi%h cost e*uity.

&. Earning Price Ration Approac1

Accordin% to this approach# the cost of e*uity is e*ual to E1 D P0'here E1is the expectedearnin%s per share for the next year# and P0is the current &ar/et price per share

5. 6eig1te& A*erage Cost of Capital

8iven the cost of specific sources of finance and the sche&e of 'ei%htin%# the WACC#the WACC can be readily calculated.

WACC M WE rE N WprpN W+r+1 O tc"

Where WE# Wpand W+ are the proportion of e*uity# preference and debtr and rE# rpandr+ are the co&ponent costs of e*uity# preference and debt and tcis the corporate taxrate


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2

.

What is F5ensitivity Analysis? +iscuss the relevance of is/ Analysis for a

Co&prehensive Project Evaluation.

2010

10"

5ensitivity analysis is a techni*ue for investi%atin% the i&pact of chan%es in projectvariables on the base,case &ost probable outco&e scenario". -ypically# only adverse chan%esare considered in sensitivity analysis. -he purpose of sensitivity analysis is>

i" to help identify the /ey variables 'hich influence the project cost and benefit strea&s

ii" to investi%ate the conse*uences of li/ely adverse chan%es in these /ey variables

iii" to assess 'hether project decisions are li/ely to be affected by such chan%es and#

iv" to identify actions that could &iti%ate possible adverse effects on the project

5ensitivity analysis needs to be carried out in a syste&atic &anner. -o &eet the above

purposes# the follo'in% steps are su%%ested>

i" identify /ey variables to 'hich the project decision &ay be sensitive

ii" calculate the effect of li/ely chan%es in these variables on the base,case ( or 3P

-he %eneration of various scenarios# each of 'hich 'ill sho' the project)s perfor&ance

'hen a series of para&eters scenario analysis"


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-he use of si&ulation techni*ues such as onte Carlo si&ulations" applied to a set of

/ey variable# and the creation of the probability distribution of output variables

considered critical usually the ( for sponsors or +5Cs"

5cenario analysis is part of the fa&ily of sensitivity analyses that serve to providepotential financers 'ith a possible spectru& of cases fro& a base case to a 'orst case". -his

is done to deter&ine the level of project solidity 'hen ne%ative contin%encies e&er%e.

5ensitivity analysis is based on lo%ic illustrated in 7i%ure B.1.

7i%ure B.1> o%ic :ehind 5ensitivity Analysis

Carryin% out sensitivities# i.e.# %eneratin% several e*ually possible scenarios# is notparticularly co&plex. (n fact# the sa&e &odel used to dra' up a base case is used a%ain toproduce scenarios. -he difference lies in the input values# 'hile obviously the al%orith&s forcalculatin% and deter&inin% results are the sa&e. @o'ever# just as it is theoretically possible to%enerate an infinite nu&ber of scenarios# 'e &ust also li&it this nu&ber to a &ana%eable level.(n fact# 'ith too &any scenarios 'e ris/ creatin% confusion for a potential participatin% ban/ orshiftin% the focus a'ay fro& the evaluation of the real ris/ factors that i&pact the project. 7orthis reason# the sensitivity analyses conducted are li&ited to a fe' alternative scenarios derived

by &anipulatin% only a s&all nu&ber of /ey variables. -he lo%ic behind sensitivity analysis is toverify the project)s de%ree of resistance to adverse chan%es in the factors that deter&ine cashflo's. (nstead of assi%nin% a definite probability of verification to a %iven event# 'hich is al'aysrather subjective# sensitivity analysis should focus on co&in% up 'ith the &axi&u& possiblevariation in a /ey variable that still allo's the debt service capacity Q debt service re*uire&entscondition to be &et. -hen it is up to the individual inter&ediaries invited to participate in theproject to decide if this extre&e variation


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is/s &ust be identified in order to ascertain the i&pact they have on a projects cashflo's ris/s &ust be allocated# instead# to create an efficient incentiviKin% tool for the partiesinvolved. (f a project participant ta/es on a ris/ that &ay affect perfor&ance adversely in ter&sof revenues or financin%# this player 'ill prevent the ris/ fro& occurrin%.

-he purpose of invest&ent appraisal is to assess the econo&ic prospects of a proposed

invest&ent project. (t is a &ethodolo%y for calculatin% the expected return based on cashflo'forecasts of &any# often inter,related# project variables. is/ e&anates fro& the uncertaintyenco&passin% these projected variables. -he evaluation of project ris/ therefore depends# onthe one hand# on our ability to identify and understand the nature of uncertainty surroundin% the/ey project variables and on the other# on havin% the tools and &ethodolo%y to process its ris/i&plications on the return of the project.

Project uncertaint+-he first tas/ of project evaluation is to esti&ate the future values of the projected variables.8enerally# 'e utilise infor&ation re%ardin% a specific event of the past to predict a possiblefuture outco&e of the sa&e or si&ilar event. -he approach usually e&ployed in invest&entappraisal is to calculate a Rbest esti&ateS based on the available data and use it as an input in

the evaluation &odel. -hese sin%le,value esti&ates are usually the &ode1 the &ost li/elyoutco&e"# the avera%e# or a conservative esti&ate.

(n selectin% a sin%le value ho'ever# a ran%e of other probable outco&es for each projectvariable data 'hich are often of vital i&portance to the invest&ent decision as they pertain tothe ris/ aspects of the project" are not included in the analysis. :y relyin% co&pletely on sin%levalues as inputs it is i&plicitly assu&ed that the values used in the appraisal are certain. -heoutco&e of the project is# therefore# also presented as a certainty 'ith no possible variance or&ar%in of error associated 'ith it.

eco%nisin% the fact that the values projected are not certain# an appraisal report is usuallysupple&ented to include sensitivity and scenario analysis tests. 5ensitivity analysis# in its

si&plest for involves chan%in% the value of a variable in order to test its i&pact on the finalresult. (t is therefore used to identify the project)s &ost i&portant# hi%hly sensitive# variables.

5cenario analysis re&edies one of the shortco&in%s of sensitivity analysis by allo'in% thesi&ultaneous chan%e of values for a nu&ber of /ey project variables thereby constructin% analternative scenario for the project. Pessi&istic and opti&istic scenarios are usually presented.

5ensitivity and scenario analyses co&pensate to a lar%e extent for the analytical li&itation ofhavin% to strait,jac/et a host of possibilities into sin%le nu&bers. @o'ever useful thou%h# bothtests are static and rather arbitrary in their nature.

-he use of ris/ analysis in invest&ent appraisal carries sensitivity and scenario analyses

throu%h to their lo%ical conclusion. onte Carlo si&ulation adds the di&ension of dyna&icanalysis to project evaluation by &a/in% it possible build up rando& scenarios 'hich areconsistent 'ith the analyst)s /ey assu&ptions about ris/. A ris/ analysis application utilises a

'ealth of infor&ation# be it in the for& of objective data or expert opinion# to *uantitativelydescribe the uncertainty surroundin% the /ey project variables as probability distributions# and tocalculate in a consistent &anner its possible i&pact on the expected return of the project.

-he output of a ris/ analysis is not a sin%le,value but a probability distribution of all possibleexpected returns. -he prospective investor is therefore provided 'ith a co&plete ris/Dreturn


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profile of the project sho'in% all the possible outco&es that could result fro& the decision tosta/e his &oney on a particular invest&ent project.

is/ analysis co&puter pro%ra&s are &ere tools for overco&in% the processin% li&itations'hich have been containin% invest&ent decisions to be &ade solely on sin%le,value orRcertainty e*uivalentS" projections.

H What are the &ain differences bet'een 3et Present


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Calculation of the desired rates of return presents serious proble&s. 8enerally cost of

capital is the basis of deter&inin% the desired rate. -he calculation of cost of capital isitself co&plicated. oreover# desired rates of return 'ill vary fro& year to year.

-his &ethod is an absolute &easure. When t'o projects are bein% considered# this

&ethod 'ill favour the project 'hich has hi%her 3P


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&utually exclusive# both &ethods 'ill %ive contradictory results. When t'o &utually exclusiveprojects are not expected to have the sa&e life# 3P< and ( &ethods 'ill %ive conflictin%ran/in%.


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I +iscuss the various +iscounted Cash 7lo' +C7" techni*ues for evaluation cash

flo's for co&parin% &utually exclusive invest&ent proposals.

200!

10"

Net Present Value $et1o&

-he objective of the fir& is to create 'ealth by usin% existin% and future resources to produce%oods and services. -o create 'ealth# inflo's &ust exceed the present value of all anticipatedcash outflo's. 3et present value is obtained by discountin% all cash outflo's and inflo'sattributable to a capital invest&ent project by a chosen percenta%e.-he &ethod discounts the net cash flo's fro& the invest&ent by the &ini&u& re*uired rate ofreturn# and deducts the initial invest&ent to %ive the yield fro& the funds invested. (f yield ispositive the project is acceptable. (f it is ne%ative the project in unable to pay for itself and isthus unacceptable. -he exercise involved in calculatin% the present value is /no'n as)+iscountin%) and the factors by 'hich 'e have &ultiplied the cash flo's are /no'n as the)+iscount 7actors). -he discount factor is %iven by thefollo'in% expression>1 r"n

1

Wherer M ate of interest per annu&.n M nu&ber of years over 'hich 'e are discountin%.$erits(t is based on the assu&ption that cash flo's# and hence dividends# deter&ineshare holders 'ealth.Cash flo's are subjective than profits.(t considers the ti&e O value of &oney.(t considers the total benefits arisin% out of proposals over its life,ti&e.-he future discount rate nor&ally varies due to lon%er ti&e span. -his rate can be applied in

calculatin% the 3P< by alterin% the deno&inator.-his &ethod is particularly useful for the selection of &utually exclusive projects. (n &utuallyexclusive projects acceptance of one project tanta&ount to rejection of the other project. "-his &ethod of project selection is instru&ental in achievin% the financialobjective. i.e.# the &axi&iKation of the shareholders 'ealth.

De%erits(t is difficult to calculate as 'ell as understand as co&pared to accountin% rate of return &ethodor paybac/ period &ethod.Calculation of the desired rates of return presents serious proble&s. 8enerally cost of capital isthe basis of deter&inin% the desired rate. -he calculation of cost of capital is itself co&plicated.oreover# desired rates of return 'ill vary fro& year to year.

-his &ethod is an absolute &easure. When t'o projects are bein% considered# this &ethod 'illfavour the project 'hich has hi%her 3P


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Internal Rate of Return $et1o&(nternal rate of return (" is a percenta%e discount rate used in capital invest&ent appraisals

'hich brin%s the cost of a project and its future cash inflo's into e*uality. (t is the rate of return'hich e*uates the present value of anticipated net cash flo's 'ith the initial outlay. -he ( isalso defined as the rate at 'hich the net present value is Kero.

-he rate for co&putin% ( depends as ban/ lendin% rate or opportunity cost of funds to invest'hich is often called as personal discountin% rate or accountin% rate. -he test of profitability of aproject is the relationship bet'een the ( U" of the project and the &ini&u& acceptable rateof return U". -he ( can be stated in for& of a ratio as sho'n belo' >

Cash (nflo's,,,,,,,,,,,,,,,,,,,, M 1Cash 9utflo's

9r P.


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(t is easy to understand for exa&ple if told that ( of an invest&ent is 20U a%ainst the desiredrate of an invest&ent is s.1I#G$BD,.

De%erits(t does not use the concept of desired rate of return 'hereas it provides the rate of return 'hichis indicative of the profitability of invest&ent proposal.

(t involves tedious calculations# based on trial and error &ethod.(t produces &ultiple rates 'hich can be confusin%.Projects selected based on hi%her ( &ay not be profitable.=nless the life of the project can be accurately esti&ated# assess&ent of cash flo's cannot becorrectly &ade.5in%le discount rate i%nores the varyin% future interest rates.

Profita-ilit+ In&e8 $et1o&-he profitability index P(" is the present value of an anticipated future cash inflo's divided bythe initial outlay. -he only difference bet'een the net present value &ethod and profitabilityindex &ethod is that 'hen usin% the 3P< techni*ue the initial outlay is deducted fro& thepresent value of anticipated cash inflo's # 'hereas 'ith the profitability index approach the

initial outlay is used as a divisor. in %eneral ter&s# a project is acceptable if its profitability indexvalue is %reater than 1. Clearly# a project offerin% a profitability index %reater than 1 &ust alsooffer a net present value 'hich is positive. When &ore than one project proposals areevaluated# for selection of one a&on% the the project 'ith hi%her profitability index 'ill beselected.athe&atically.P( profitability index" can be expressed as follo's > ,

Present


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Section 5 - PROJECT /INANCING:

1 What are the various 'ays of financin% a project alon% 'ith relative

&erits and de&erits of each of the&?

2011 !"# 2010 10"#

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efer scanned copies# or Prasanna Chandra chapter 1! or Attar'ala notes pa%e GBI


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Section 6 - PROJECT LI/E CYCLE AND ORGANI7ATION:

1 When do you a jud%e a project to be a failure? What are the possible causes of

project failures?

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Project is underta/en 'ith definitive objectives# before the start of the project# it has its scope#ti&eline# cost and ulti&ate benefits of doin% the project stated clearly. 9nce the i&ple&entationstarts project &onitorin% and controllin% %ets reported thru project perfor&ance reports. 9ne ofthe indicator of project deviatin% fro& its defined para&eters is 'hen either actual 'or/co&pleted in actual ti&e at actual cost is not e*ual to bud%eted 'or/ in bud%eted ti&e and cost.-his para&eter does not state that ulti&ate objective &ay not be &et.

When ulti&ate product delivered out of the project fails to &eet the defined objectives it is aclear indicator of project failure.

:efore loo/in% at causes of failure one should loo/ at the top I factors found insuccessful projects are>1. =ser (nvolve&ent2. Executive ana%e&ent 5upportG. Clear 5tate&ent of e*uire&entsH. Proper Plannin%I. ealistic Expectations

3o' the &ajor reasons 'hy project fail1. Clearly defined %oals includin% the %eneral project philosophy or %eneral &issionof the project# as 'ell as co&&it&ent to those %oals on the part of the tea& &e&bers".

2. Co&petent project &ana%er. -he i&portance of initial selection of s/illedinterpersonally# technically# and ad&inistratively" project leader.G. -op ana%e&ent 5upport. -op or divisional &ana%e&ent support for the projectthat has been conveyed to all concerned parties.H. Co&petent project tea& &e&bers. -he i&portance of selectin% and# if necessary#tria%in% project tea& &e&bers.I. 5ufficient resource allocation. -hese are esources in the for& of &oney#personnel# lo%istics# etc.B. Ade*uate co&&unication channels. 5ufficient infor&ation is available on theproject objectives# status# chan%es# or%aniKational coordination# clients needs# etc.L. Control echanis&s. (ncludin% plannin%# schedules# etc.". Pro%ra&s are in placeto deal 'ith initial plans and schedules.

!. 7eedbac/ capabilities. All parties concerned 'ith the project area able to revie'project status# &a/e su%%estions# and corrections throu%h for&al feedbac/ channels orrevie' &eetin%s.$. esponsiveness to client. All potential users of the project are consulted 'ith and/ept up to date on project status. 7urther# clients receive assistance after the projecthas been successfully i&ple&ented.10. Client consultation. -he project tea& &e&bers share solicited input fro& allpotential clients of the project. -he project tea& &e&bers understand the needs ofthose 'ho 'ill use the syste&s.


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11. -echnical tas/s. -he technolo%y that is bein% i&ple&ented 'or/s 'ell. Experts#consultants# or other experienced project &ana%ers outside the project tea& haverevie'ed and criti*ued the 1basic approach.12. Client Acceptance. Potential clients have been contacted about the usefulness ofthe project. Ade*uate advanced preparation has been done to best deter&ine ho' tosell the project to the clients.

1G. -rouble,shootin%. Project tea& &e&bers spend a part of each day loo/in% forproble&s that have surfaced or are about to surface. Project tea& &e&bers areencoura%ed to ta/e *uic/ action on proble&s on their o'n initiative.1H. 8ood Plannin%-he first indicator# 8ood Plannin%# re*uires excellent for'ard plannin%# 'hich includesdetailed plannin% of the process i&ple&entation sta%es# tas/ ti&eliness# fall,bac/positions# and re,plannin%. 3otice that initial plannin% is not enou%h. Projects often ta/e

'ron% turns# or initial solutions prove unfounded. -he project &ana%er 'ho does notprepare to re,plan# or has not considered and planned fall,bac/ positions 'hen initialplans fail# 'ill often find that the project first stalls# and then fails. We &ust re&e&berthat project &ana%e&ent is not a strai%ht,line process# but an iterative process thatre*uires a%ile rethin/in% as the /no'n environ&ent chan%es before your eyes.

1I. Clear esponsibility and Accountability of -ea& e&bers-his re*uires that all tea& &e&bers have a clear understandin% of their roles and dutiesin the project. -hey &ust understand ho' expectations vs. achieve&ents 'ill be&easured and %raded. (t is left to the project &ana%er to properly i&ple&ent theco&&unication of these responsibilities# to provide feedbac/# and to assure allunderstand that for 'hich they 'ill be held accountable.1B. 5chedule Control-his re*uires the continual &onitorin% and &easure&ent of ti&e# &ilestones# people#and e*uip&ent schedules. Properly done schedule control 'ill also %ive the first hintthat initial plannin% &ay not be %oin% accordin% to schedule.

1L =se of Consultants# and Well ualified Personnel. E*ual nu&bers of successful and

failed projects used consultants# and the sa&e 'as true for 'ell,*ualified personnel.

1!. ac/ of Efficient (nternal Co&&unication in/s# ac/ of Efficient ExternalCo&&unication in/s# ac/ of esponsive +ecision a/in%# and ac/ of Effective-ea&'or/.

8ood project &ana%e&ent is a process of continuous i&prove&ent. (t is a process of&a/in% &ista/es and learnin% fro& those &ista/es. (t is a process of continuous studyand learnin%.


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Section 9 : Project $anage%ent process for a project

1 +ifferentiate bet'een FProject onitorin% and FProject Control?

Explain Project onitorin% and Control Cycle.

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onitorin% is collectin%# recordin%# and reportin% infor&ation concernin% any and allaspects of project perfor&ances that the project &an%er and all other in the or%aniKation

'ish to /no'.S

Why do 'e &onitor O

5i&ply because 'e /no' that thin%s dont al'ays %o accordin% to plan no &atter ho'&uch 'e prepare"

-o detect and react appropriately to deviations and chan%es to plans

What do 'e &onitor

en hu&an resources"

achines

aterials

oney

5pace

-i&e

-as/s

ualityD-echnical Perfor&ance(nputs

-i&e

oney

esources aterial =sa%e

-as/s

ualityD-echnical Perfor&ance9utputs

Pro%ress

Costs

;ob starts

;ob co&pletion

En%ineerin% D +esi%n chan%es


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At tas/ co&pletion

At pre,planned decision points &ilestones"

Where do 'e &onitor?

At head office?

At the site office?

9n the spot?

+epends on situation and the F'hats

@o' do 'e &onitor

-hrou%h &eetin%s 'ith clients# parties involved in project Contractor# supplier#etc."

7or schedule O =pdate CPA# PE- Charts# =pdate 8antt Charts

=sin% Earned


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-he onitorin% and Controllin% Process 8roup consists of those processes re*uired to trac/#revie'# and re%ulate the pro%ress and perfor&ance of the project identify any areas in 'hichchan%es to the plan are re*uired and initiate the correspondin% chan%es. -he /ey benefit of thisprocess %roup is that project perfor&ance is observed and &easured re%ularly and consistentlyto identify variances fro& the project &ana%e&ent plan. -he &onitorin% and controllin% process%roup also includes>Controllin% chan%es and reco&&endin% preventive action in anticipation of possibleproble&s#onitorin% the on%oin% project activities a%ainst the project &ana%e&ent plan and the projectperfor&ance baseline# and(nfluencin% the factors that could circu&vent inte%rated chan%e control so only approved

chan%es are i&ple&ented.-his continuous &onitorin% provides the project tea& insi%ht into the health of the project andidentifies any areas re*uirin% additional attention. -he &onitorin% and controllin% process %roupnot only &onitors and controls the 'or/ bein% done 'ithin a process %roup# but also &onitorsand controls the entire project effort. (n &ulti,phase projects# the &onitorin% and controllin%process %roup coordinates project phases in order to i&ple&ent corrective or preventive actionsto brin% the project into co&pliance 'ith the project &ana%e&ent plan.

onitor and Control Project Wor/onitor and Control Project Wor/ is the process of trac/in%# revie'in%# and re%ulatin% thepro%ress to &eet the perfor&ance objectives defined in the project &ana%e&ent plan.onitorin% includes status reportin%# pro%ress &easure&ent# and forecastin%. Perfor&ance

reports provide infor&ation on the projects perfor&ance 'ith re%ard to scope# schedule# cost#resources# *uality# and ris/# 'hich can be used as inputs to other processes.

Perfor& (nte%rated Chan%e Control is the process of revie'in% all chan%e re*uests# approvin%chan%es# and &ana%in% chan%es to the deliverables# or%aniKational process assets# projectdocu&ents# and the project &ana%e&ent plan.


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Control 5cope is the process of &onitorin% the status of the project and product scope and&ana%in% chan%es to the scope baseline.

Control 5chedule is the process of &onitorin% the status of the project to update projectpro%ress and &ana%in% chan%es to the schedule baseline.

Control Costs is the process of &onitorin% the status of the project to update the project bud%etand &ana%in% chan%es to the cost baseline.

Perfor& uality Control is the process of &onitorin% and recordin% results of executin% the*uality activities to assess perfor&ance and reco&&end necessary chan%es.

eport Perfor&ance is the process of collectin% and distributin% perfor&ance infor&ationincludin% status reports# pro%ress &easure&ents# and forecasts.

onitor and Control is/s is the process of i&ple&entin% ris/ response plans# trac/in% identifiedris/s# &onitorin% residual ris/s# identifyin% ne' ris/s# and evaluatin% the ris/ process throu%houtthe project.

Ad&inister Procure&ents is the process of &ana%in% procure&ent relationships# &onitorin%contract perfor&ance# and &a/in% chan%es and corrections as needed.


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Section 6 Time Management

1 PE- net'or/ 'ill act as only 'all decorators in a business enterprise# since there

are slippa%es of the project despite all the PE- chart. +o you a%ree 'ith the vie'?

Explain.

2011

B"

( do not a%ree 'ith the vie' that PE- net'or/ 'ill act as only 'all decorators in a business

enterprise# since there are slippa%es of the project despite all the PE- chart.

(n 1$I!# the =nited 5tates 3avy needed a 'ay to &onitor and control the Prolaris issile

Pro%ra&. (t especially needed a &ethod for &ini&iKin% the conflicts# delays and interruptions

that so fre*uently pla%ue acco&plish that# the 3avy developed the Pro%ra& Evaluation and

evie' -echni*ue PE-". PE- has several distin%uishin% characteristics>

It forms the basis for all planning and predicting and provides management with the ability toplan for best possible use of resources to achieve a given goal within time and cost limitations.

It provides visibility and enables management to control oneofa!ind" programs as opposed to

repitive situations.

It helps management handle the uncertainties involved in programs by answering such #uestions

as how time delays in certain elements influence pro$ect completion% where slac! e&ists between

elements% and what elements are crucial to meet the completion date. This provides management

with a means for evaluating alternatives.

It provides a basis for obtaining the necessary facts for decision ma!ing.

It utili'es a socalled time networ! analysis as the basic method to determine manpower% material

and capital re#uirements as well as providing a means for chec!ing progress.

It provides the basic structure for reporting information.

It reveals interdependencies of activities.

It facilitates whatif" e&ercises.

It identifies the longest path or critical path.

It allows us to perform scheduling ris! analysis.

A bi% advanta%e of PE- is the /ind of plannin% re*uired to create a &ajor net'or/. 3et'or/

develop&ent and critical path analysis reveal interdependencies and proble& areas that are

neither obvious nor 'ell defined by other plannin% &ethods. -he techni*ue therefore deter&ines

'here the %reatest effort should be &ade for a project to stay on schedule.

-he second advanta%e of PE- is that one can deter&ine the probability of &eetin% specifieddeadlines by develop&ent of alternative plans. (f the decision &a/er is statistically

sophisticated# he can exa&ine the standard deviations nd the probability of acco&plish&ent

data. (f there exists a &ini&u& if uncertainty one &ay use the sin%le,ti&e approach# of course#

'hile retainin% the advanta%e of net'or/ analysis.

-he third advanta%e is the ability to evaluate the effect of chan%es in the pro%ra&s. 7or

exa&ple# PE- can evaluate the effect of a conte&plated shift of resources fro& the less


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critical activities to the activities identified as probable bottlenec/s. 9ther resources and

perfor&ance trade,offs &ay also be evaluated. PE- can also evaluate the effect of a deviation

in the actual ti&e re*uired for an activity fro& 'hat has been predicted.

7inally# PE- allo's a lar%e a&ount of sophisticated data to be presented in a 'ell,or%aniKed

dia%ra& fro& 'hich the contractor and custo&er can &a/e joint decisions.


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2 What do you understand by F-hree -i&e Esti&ates &ethod for net'or/

schedulin% and under 'hat circu&stances it is used? What is the probability of

co&pletin% the project 'ithin the total scheduled ti&e calculated on the basis of

-hree -i&e Esti&ate ethod?

2010

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-hree,Point Esti&ates

-he accuracy of activity duration esti&ates can be i&proved by considerin% esti&ation

uncertainty and ris/. -his concept ori%inated 'ith the Pro%ra& Evaluation and evie'

-echni*ue PE-". PE- uses three esti&ates to define an approxi&ate ran%e for an activitys

duration>

T ost li/ely t". -he duration of the activity# %iven the resources li/ely to be assi%ned# their

productivity# realistic expectations of availability for the activity# dependencies on otherparticipants# and interruptions.

T 9pti&istic t9". -he activity duration is based on analysis of the best,case scenario for the

activity.

T Pessi&istic tP". -he activity duration is based on analysis of the 'orst,case scenario for the

activity.

PE- analysis calculates an Expected tE" activity duration usin% a 'ei%hted avera%e of these

three esti&ates>

tEM t9N HtN tP

B

+uration esti&ates based on this e*uation or even on a si&ple avera%e of the three points"

&ay provide &ore accuracy# and the three points clarify the ran%e of uncertainty of the duration

esti&ates.

(n application# PE- has pri&arily been used for 6 + projects# the type of projects for 'hich it

'as developed# for the 5pecial Projects 9ffice of the =5 3avy by consultin% fir& of :ooK# Allen

and @a&ilton# thou%h its use is &ore co&&on on the Rdevelop&entS side of 6 + than it is onthe RresearchS side. -he PE- &ethod is &ost used in situations 'here little experience exists

on 'hich to base esti&ated of activity duration. (n such cases a probabilistic approach li/e the

PE- approach %ives the &ost appropriate outputs. (t helps in deter&inin% the probability of

&eetin% specified deadlines by develop&ent of alternate plans


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-he probability of co&pletin% the project 'ithin the total scheduled ti&e calculated on the basis

of -hree -i&e Esti&ate ethod is I0U Area under the nor&al distribution 'here -otal tEof

activities on a critical path is at the centre of the nor&al distribution curve.


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G @o' do resource constraints affect the project schedules? +iscuss various

proble&s encountered in resource allocation to activities under a situation of

&ultiple resource re*uire&ent 'ith li&ited availability and 'hat the different

alternatives to allocate resources 'ithout affectin% final co&pletion date?

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5chedulin% procedures should address the issues of resource utiliKation and availability. We

&ust refer to individual types of labour# specific facilities# /inds of &aterials# individual pieces of

e*uip&ent# and other discrete inputs that are relevant to an individual project but are li&ited

constrained" in availability. 5chedules should be evaluated not &erely in ter&s of &eetin%

project &ilestones# but also in ter&s of the ti&in% and use of scarce resources. A funda&ental

&easure of Ps success in project &ana%e&ent is the s/ill 'ith 'hich the trade,offs a&on%

perfor&ance# ti&e# and cost are &ana%ed.

9ccasionally# it is possible that so&e additional resources can be added at little or no cost. Atother ti&es# so&e resources in abundant supply &ay be traded for scarce ones. ost of the

ti&e these trades entail additional cost to the or%aniKation.

(n a esource li&ited schedule# the project &ust be finished as soon as possible# but 'ithout

exceedin% so&e specific levels of resource usa%e or so&e %eneral resource constraint. (n &ost

cases# the schedule &ay extend beyond the schedule %enerated by not ta/in% the resource

constraints into account. -his could happen if sufficient resources esti&ated for the critical

activities are not available at re*uired levels or for non,critical activities are not available even

after ta/in% into account the floatDslac/.

(n the resource allocation to activities under a situation of &ultiple resource re*uire&ents 'ith

li&ited availability# nu&ber of proble&s can be encountered for critical activities# as follo's>

Some of the resources may be available but others may not be available during a particular

period.

Some of the resources may be available at a re#uired level% however% other resources may not be

available at the re#uired level.

(ll the resources may be available but not at the re#uired level.

(n above cases# different alternatives to allocate resources 'ithout affectin% final co&pletion

date are>


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H What are floats or slac/s in project schedules and ho' are they used in effective

&ana%e&ent of projects? @o' do the ter&s F-otal float and F7ree 7loat differ in

their si%nificance? When can project schedule calculations sho' F3e%ative 7loats?

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7loats or slac/s are the ti&e periods by 'hich activities or events can be delayed 'ithout

delayin% the project finish date.

Activities or events havin% Kero float or slac/ are critical activities or events. Any delay in these

activities or events 'ill lead to delay in project co&pletion date.

@ence# they are used for effective &ana%e&ent of projects as follo's>

/on0ritical activities are given second priority for resources application as compared to critical

activities.

/on0ritical activities are allowed to the delayed to the e&tent of float. slac! since it will not

affect the completion date of the pro$ect.

Ine&perienced personnel can be put on activities with float or slac!.

)esource leveling can be done by reducing resources on noncritical activities to bring them to

the re#uired level.

)esource smoothing can be done by reducing resources on noncritical activities to smoothen the

level of resources.

0rashing techni#ue can be applied on 0ritical activities with minimum unit crashing cost per

duration

(n order to i&ple&ent this# PE- 6 CP charts are reconstructed 'ith ti&e scales# in 'hich

case a decision &ust be &ade as to 'hether 'e 'ish early or late ti&e re*uire&ents for slac/

variablesD

7loat is a ter& used in CP techni*ue for activities.

-otal 7loat> -he total a&ount of ti&e that a schedule activity &ay be delayed fro& its early start

date 'ithout delayin% the project finish date# or violatin% a schedule constraint. Calculated usin%

the critical path &ethod techni*ue and deter&inin% the difference bet'een the early finish dates


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and late finish dates. 7ree 7loat> -he a&ount of ti&e that a schedule activity can be delayed

'ithout delayin% the early start date of any i&&ediately follo'in% schedule activities.

5lac/ is a ter& used for events in PE- techni*ue for events.

5lac/> +ifference bet'een the latest allo'able date on 'hich an event can ta/e place 'ithout

extendin% the co&pletion date of the project and the earliest expected date on 'hich asn event

can be expected to ta/e place.

3e%ative 7loats usually occur 'hen the for'ard pass extends beyond the custo&ers end date.

@o'ever# the bac/'ard pass is still &easured fro& the custo&ers co&pletion date# thus

creatin% ne%ative float. -his &ost li/ely to result 'hen>

The original plan was highly optimistic% but unrealistic

The customer1s end date was unrealistic

2ne or more activities slipped during pro$ect e&ecution

The assigned resources did not possess the correct s!ill levels

The re#uired resources would not be available until a later date.

(n any case# ne%ative float is an early 'arnin% indicator that corrective action is needed to

&aintain the custo&ers end date.


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I :rin% out the difference bet'een activity on Arro' A9A" and activity on node

A93" &ethod of net'or/ analysis.

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+escription Activity on Arro'

A9A"

Activity on 3ode A93"

Arro' +epicts activity +epicts dependency

3ode +epicts events +epicts activity

+u&&y

activity

5o&eti&es re*uired 3ot re*uired

etters in

nodes

(dentify events (dentify activities

E&phasis Events Activities

+ependencies 9nly 7inish to start All H dependencies can be used

=sa%e :ein% less adopted (s adopted by &ost net'or/ and schedulin%

soft'are

Choice of A9A 6 A93

(n A9A net'or/s# du&&y activities &eet t'o needs. 7irst# 'hen t'o parallel activities have the

sa&e start and end nodes# a du&&y &ust be inserted to %ive each activity a uni*ue

identification nu&ber. 3ext# du&&y activities can be used to clarify dependency relationships.

+u&&y activities are very useful 'hen activity dependencies are far apart on the net'or/. -he

&ajor advanta%e of the A9A &ethod is the avoidance of havin% to list all the predecessor and

successor activities for each activity in the net'or/ so activity se*uence and dependency can

be traced 'hen a net'or/ is not available or sho's inco&plete infor&ation. Co&puter output is

reduced &any fold.

Activity-on-node is a project management term that refers to aprecedence diagrammingmethodwhich uses boxes to denote schedule activities. These various boxes or nodes are

connected from beginning to end with arrows to depict a logical progression of the

dependencies between the schedule activities. Each node is coded with a letter or number that

correlates to an activity on the project schedule.

Typically, an activity-on-node diagram will be designed to show which activities must be

completed in order for other activities to commence. This is referred to as finish-to-start
http://project-management-knowledge.com/definitions/a/definitions/p/precedence-diagramming-method/http://project-management-knowledge.com/definitions/a/definitions/p/precedence-diagramming-method/http://project-management-knowledge.com/definitions/a/definitions/p/precedence-diagramming-method/http://project-management-knowledge.com/definitions/a/definitions/p/precedence-diagramming-method/


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precedence meaning one activity must be finished before the next one can start. In the

diagram below, activities A and D must be done so that activity E can begin. It is also possible

to create other variations of this type of diagram. For example, a start-to-start diagram is one

in which a predecessor activity must simply be started rather than fully completed in order for

the successor activity to be initiated.

An activity-on-node diagram can be used to provide a visual representation of the network

logicof an entire project schedule. Or, it can be used for any smaller section of the schedule

that lends itself to being represented as having a defined beginning and end. To keep the logic

in the diagram simple, it may be most effective to include only critical pathschedule activities.

The planned start date of each node may also be listed in the diagram legend in accordance

with the project management timeline.
http://project-management-knowledge.com/definitions/a/definitions/p/predecessor-activity/http://project-management-knowledge.com/definitions/a/definitions/s/successor-activity/http://project-management-knowledge.com/definitions/a/definitions/n/network-logic/http://project-management-knowledge.com/definitions/a/definitions/n/network-logic/http://project-management-knowledge.com/definitions/a/definitions/c/critical-path/http://project-management-knowledge.com/wp-content/uploads/2008/01/AON-Diagram.jpghttp://project-management-knowledge.com/definitions/a/definitions/p/predecessor-activity/http://project-management-knowledge.com/definitions/a/definitions/s/successor-activity/http://project-management-knowledge.com/definitions/a/definitions/n/network-logic/http://project-management-knowledge.com/definitions/a/definitions/n/network-logic/http://project-management-knowledge.com/definitions/a/definitions/c/critical-path/


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Section 3 0ost Management

1 Explain ho' F5 curves and concept of FEarned


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T Perfor&ance easure&ent :aseline P:" O -he su& of all 'or/ pac/a%es :ud%eted Cost ofWor/ 5cheduled :CW5" for each ti&e period# calculated for the total pro%ra& duration. -heP: for&s the ti&e,phased bud%et plan a%ainst 'hich project perfor&ance is &easured.T :ud%et At Co&pletion :AC" O -he su& of all the bud%ets allocated to a pro%ra&. (n additionto the P:# there %enerally is an a&ount of &ana%e&ent reserve# 'hich is a portion of the totalpro%ra& bud%et not allocated to specific 'or/ pac/a%es and 'ithheld for &ana%e&ent control

processes. -he :AC consists of the P: plus all&ana%e&ent reserve.T 5chedule


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H. -he cu&ulative cost perfor&ance index CP(" provides an early 'arnin% si%nal.I. -he schedule perfor&ance index 5P(" provides an early 'arnin% si%nal.B. -he CP( is a predictor for the final cost of the project.L. (t uses an index,based &ethod to forecast the final cost of the project.!. -he Rto,co&pleteS perfor&ance index allo's evaluation of the forecasted final cost.$. -he periodic e.%. 'ee/ly or &onthly" CP( is a bench&ar/.

10. -he &ana%e&ent by exception principle can reduce infor&ation overload.ConclusionEarned


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2 Explain the ter&s FCost Perfor&ance (ndex CP(" and F5chedule Perfor&ance (ndex

5P(" in relation to FEarned


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Applyin% the for 5P( 6 CP( calculations as stated earlier#

5P( M E


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5ection ! O @u&an esource ana%e&ent

1 +iscuss the @u&an aspects of Project ana%e&ent in relation to Authority#

Personnel 9rientation# otivation and -ea& :uildin%

200!

10"

Althou%h the use of proper plannin% and bud%etary control techni*ues help in successful project&ana%e&ent# their use and effectiveness depends on the people 'ho are involved and are

responsible for various project activities at various levels. (t is therefore very i&portant to

understand hu&an nature and to achieve satisfactory hu&an relations in project settin%. Project

&ana%er has to handle proble&s and challen%es relatin% to follo'in% issues.

1. Authority >

Project &ana%e&ent structures create a 'eb of relationships that can cause chaos in the

dele%ation of authority and the internal authority structure. 7our *uestions &ust be considered in

describin% project authority

What is project authority?What is po'er and ho' is it achieved?@o' &uch project authority should be %ranted to the project &ana%er?Who settles project authority interface proble&s?Project &ana%er very often does not have a direct authority over the project tea&. @e has to co,

ordinates efforts of various functional %roups# experts# consultants external a%encies etc. -ea&

leadership and influencin% professionals assu&es i&portance than exercisin% authority. Project

&ana%er)s authority therefore e&anates fro& his ability to develop rapport 'ith the tea&

&e&bers# s/illful resolution of conflicts# s/ill of co&&unication and persuasion and ability to act

as a buffer bet'een technical en%ineerin%# financial and co&&ercial personnel.

7ailure to establish authority relationships can result in

Poor co&&unication channels

isleadin% infor&ation

Anta%onis especially fro& the infor&al or%aniKation

Poor 'or/in% relationship 'ith superiors# subordinates# peers and associates

5urprises for the custo&er

2. Personnel 9rientation >

A &ajor proble& faced by &any project leaders in &ana%in% the anxiety that usually develops

'hen a project tea& is for&ed. -his anxiety &ay co&e fro& several sources. (t is reco&&endedthat project leader at the start of the project tal/ 'ith tea& &e&ber the follo'in%

a. What are the objectives are for the project

b. Who 'ill be involved and 'hy

c. -he i&portance of the project to the overall or%aniKation and 'or/ unit.


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d. Why the tea& &e&ber 'as selected and assi%ned to the project. What role the

tea& &e&bers 'ill perfor

e. What re'ards &i%ht be forthco&in% if the project is successfully co&pleted#

f. What proble&s and constraints are li/ely to be encountered

%. 8round rules of the project

h. What su%%estions the tea& &e&ber has for achievin% success

i. What the professional interests of the tea& &e&bers are

j. What challen%e the project 'ill present to individual &e&bers and the entire

tea&

/. Why the tea& concept is so i&portant to project &ana%e&ent success and ho'

should it 'or/

A fran/ and open discussions of the above *uestions 'ith each tea& &e&ber is

li/ely to reduce his intial anxiety.

G. otivation >

Project bein% a short tea& endeavour carried out by lossely bound professional tea it is very

difficult to /eep it &otivated throu%hout the project ter&. -he tea& &e&bers so&eti&es tend to

%et confused due to split authority and dual subordination structure of the or%aniKation. -o /eep

a hi%h level of &otivation # the project &ana%er has to ensure that the project %oals are clearly

defined and are visible to all involved. @e has to encoura%e participative &ana%e&ent 'ith

proper dele%ation of authority and responsibility that creates a sense of belon%in% to the project

and to &a/e individuals job sufficiently challen%in% to have %reater personal co&&it&ent.

H. -ea& :uildin% >

-ea&,buildin% activities can vary fro& a five,&inute a%enda ite& in a status revie' &eetin% toanoff,site# professionally facilitated experience desi%ned to i&prove interpersonal relationships.-heobjective of tea&,buildin% activities is to help individual tea& &e&bers 'or/ to%ether effectively.

-ea&,buildin% strate%ies are particularly valuable 'hen tea& &e&bers operate fro& re&otelocations 'ithout the benefit of face,to,face contact. (nfor&al co&&unication and activities canhelp in buildin% trust and establishin% %ood 'or/in% relationships.


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Section : ; : S1ort Notes : All Notes

A +efine a Project. What are the characteristics of a Project? O Iar/s

200L

Websters dictionary defines Project as >,

A proposal of so&ethin% to be done# Plan sche&e# an underta/in% specific tas/#

A special unit of 'or/# research# etc. as in school# a laboratory# etc.

An extensive public underta/in%# as in conservation# construction# etc.

P:9 defines Project asA project is a te&porary endeavor underta/en to create a uni*ue product# service# or result. -hete&porary nature of projects indicates a definite be%innin% and end. -he end is reached 'henthe projects objectives have been achieved or 'hen the project is ter&inated because itsobjectives 'ill not or cannot be &et# or 'hen the need for the project no lon%er exists.-e&porary does not necessarily &ean short in duration. -e&porary does not %enerally apply tothe product# service# or result created by the project &ost projects are underta/en to create alastin% outco&e. 7or exa&ple# a project to build a national &onu&ent 'ill create a resultexpected to last centuries.Projects can also have social# econo&ic# and environ&ental i&pacts that far outlast the projectsthe&selves. Every project creates a uni*ue product# service# or result. Althou%h repetitiveele&ents &ay be present in so&e project deliverables# this repetition does not chan%e thefunda&ental uni*ueness of the project 'or/. 7or exa&ple# office buildin%s are constructed 'iththe sa&e or si&ilar &aterials or by the sa&e tea but each location is uni*ueX'ith a differentdesi%n# different circu&stances# different contractors# and so on.

An on%oin% 'or/ effort is %enerally a repetitive process because it follo's an or%aniKationsexistin% procedures. (n contrast# because of the uni*ue nature of projects# there &ay beuncertainties about the products# services# or results that the project creates. Project tas/s canbe ne' to a project tea 'hich necessitates &ore dedicated plannin% than other routine 'or/.(n addition# projects are underta/en at all or%aniKational levels. A project can involve a sin%leperson# a sin%le or%aniKational unit# or &ultiple or%aniKational units.

A project can create>

A product that can be either a co&ponent of another ite& or an end ite& in itself#

A capability to perfor& a service e.%.# a business function that supports production or

distribution"# or

A result such as an outco&e or docu&ent e.%.# a research project that develops

/no'led%e that can be used to deter&ine 'hether a trend is present or a ne' process'ill benefit society".

Exa&ples of projects include# but are not li&ited to> +evelopin% a ne' product or service#

Affectin% a chan%e in the structure# staffin%# or style of an or%aniKation#

+evelopin% or ac*uirin% a ne' or &odified infor&ation syste

Constructin% a buildin% or infrastructure# or

(&ple&entin% a ne' business process or procedure.

Attri-utes of projects


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=ni*ue definable sin%le purpose.

-e&porary# one ti&e activity# never to be e8actl+repeated.

e*uire resources# often fro& various areas.

-ea&s are for&ed for a purpose and disbanded after achievin% the purpose.

Projects cut across the or%aniKational lines &any disciplines are involved.

5hould have a pri&ary sponsor andDor custo&er D sta/e holderDs (nvolve uncertainty and unfa&iliarity# does not fall under the RroutineS cate%ory of activity

Project is the process of 'or/in% to achieve a pre,defined %oal and durin% the process#

the project &ay pass throu%h various phases


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Project ana%e&ent and its scope O Iar/s

2011# 2010#200!

Project &ana%e&ent is the application of /no'led%e# s/ills# tools# and techni*ues to projectactivities to &eet project re*uire&ents. Project &ana%e&ent is acco&plished throu%h theappropriate application and inte%ration of the forty,t'o lo%ically %rouped project &ana%e&entprocesses co&prisin% the five process %roups. -hese five process %roups are>

(nitiatin%#

Plannin%#

Executin%#

onitorin% and Controllin%# and

Closin%.

ana%in% a project typically includes>

(dentifyin% re*uire&ents# Addressin% the various needs# concerns# and expectations of the sta/eholders as the

project is planned and carried out#

:alancin% the co&petin% project constraints includin%# but not li&ited to>

5cope#

uality#

5chedule#

:ud%et#

esources# and

is/.

-he specific project 'ill influence the constraints on 'hich the project &ana%er needs to focus.

-he relationship a&on% these factors is such that if any one factor chan%es# at least one otherfactor is li/ely to be affected. 7or exa&ple# if the schedule is shortened# often the bud%et needsto be increased to add additional resources to co&plete the sa&e a&ount of 'or/ in less ti&e. (fa bud%et increase is not possible# the scope or *uality &ay be reduced to deliver a product inless ti&e for the sa&e bud%et. Project sta/eholders &ay have differin% ideas as to 'hich factorsare the &ost i&portant# creatin% an even %reater challen%e. Chan%in% the project re*uire&ents&ay create additional ris/s. -he project tea& &ust be able to assess the situation and balancethe de&ands in order to deliver a successful project.

:ecause of the potential for chan%e# the project &ana%e&ent plan is iterative and %oes throu%hpro%ressive elaboration throu%hout the projects life cycle. Pro%ressive elaboration involves

continuously i&provin% and detailin% a plan as &ore,detailed and specific infor&ation and &oreaccurate e$tim"te$ beco&e available. Pro%ressive elaboration allo's a project &ana%e&enttea& to &ana%e to a %reater level of detail as the project evolves.

no'led%e areas describe the scope of project &ana%e&ent

7our core /no'led%e areas lead to specific project objectives scope# ti&e# cost# and

*uality"

7our facilitatin% /no'led%e areas are the &eans throu%h 'hich the project objectives are

achieved hu&an resources# co&&unication# ris/# and procure&ent &ana%e&ent"


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9ne /no'led%e area project inte%ration &ana%e&ent" affects and is affected by all of

the other /no'led%e areas


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:asic functions of a Project ana%er O Iar/s

200!

-he project &ana%er is the person assi%ned by the perfor&in% or%aniKation to achieve theproject objectives. -he role of a project &ana%er is distinct fro& a functional &ana%er or

operations &ana%er. -ypically the functional &ana%er is focused on providin% &ana%e&entoversi%ht for an ad&inistrative area# and operations &ana%ers are responsible for a facet of thecore business.+ependin% on the or%aniKational structure# a project &ana%er &ay report to a functional&ana%er. (n other cases# a project &ana%er &ay be one of several project &ana%ers 'ho reportto a portfolio or pro%ra& &ana%er that is ulti&ately responsible for enterprise,'ide projects. (nthis type of structure# the project &ana%er 'or/s closely 'ith the portfolio or pro%ra& &ana%erto achieve the project objectives and to ensure the project plan ali%ns 'ith the overarchin%pro%ra& plan.

@is responsibility is to plan# or%aniKe# direct and inte%rate 'or/ efforts of all participantsto achieve the set project %oals costs# ti&e schedules and scope %oals".

9ne person in the or%aniKation 'ho is accountable for the project and is totally

dedicated to achievin% its %oals.

eadership *ualities are essential.

D!TIES "F A PR"


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(- and Project ana%e&ent O Iar/s

200!

ana%in% an (- project is not an easy job and today in co&petitive industry 'here the custo&er

expect Ffirst ti&e ri%ht and at ri%ht ti&e the project &ana%e&ent fra&e 'or/ plays an i&portantrole. (nfor&ation technolo%y is especially slippery because it)s al'ays &ovin%# chan%in%#

adaptin% and challen%in% business. 8enerally all projects are constrained by three factors> ti&e#

cost and scope and for any project to be successful# these three constraints &ust be in

sy&&etry. (f any constraint is out of e*uilibriu the project increases its chances to head for

disaster. (n case of (- industry# all projects &ove throu%h five phases in the project &ana%e&ent

lifecycle# i.e. initiatin%# plannin%# executin%# &onitorin% and controllin%# and closin%. Each phase

contains processes that &ove the project fro& idea to i&ple&entation.

@o'ever# in &ost of the cases (- projects fre*uently fail. Accordin% to the 5tandish 8roup#

'hich trac/s (- project success rates# only 2$ percent of (- projects conducted in 200H 'ere

co&pleted successfully. -he nu&bers are discoura%in% for a various reasons. A surprisin%statistic reveals the &ajority of (- projects# despite bein% planned# still end up not &eetin%

outlined project %oals throu%hout their planned course# both in ter&s of /eepin% 'ith ti&e and

bud%etin% available &oney.

(- projects fail because due to a lac/ of sufficient plannin%. An (- or%aniKation &ust thin/ the

resources it needs to devote to a project# the s/ills re*uired# the people 'ho need to be

involved# and practically jud%e the ti&e it 'ill ta/e to i&ple&ent the project deliverables.

3evertheless# 'ith &odern,day e&phasis bein% on %ettin% &ore ban%s for the cash# (- has to

&ana%e projects &ore effectively. -he constant %ro'in% challen%e has led &any (- fir&s fro&

all across the 'orld to turn to Project ana%e&ent as a 'ay to boost (- efficiency# cut costs#and i&prove on project delivery in ter&s of ti&e and bud%et.

oo/in% at the present picture of %lobal (- industry# the ratio of (- projects has increased

dra&atically. (n addition to this# 'ith the constant increase of (- projects the call for (- Project

ana%ers have also boo&ed. -he (- project &ana%er is the person 'ho is responsible for the

&ana%e&ent of all activity necessary for the delivery of (- project so that it &eets the

expectations and satisfaction of the custo&er# 'ithin an a%reed ti&e fra&e and 'ithin bud%et

constraints.

-hou%h infor&ation technolo%y trainin% for (- project &ana%ers can help the& up%rade their

technical /no'led%e# but &ay not /no' ho' co&panys technolo%y fits into the bi%%er picturefro& a business perspective. -he success of a project often rests on the understandin% of

related people and &ana%e&ent issues# rather than technical issues. -hats 'here project

&ana%e&ent trainin% beco&es i&portant.

Project &ana%e&ent trainin% addressin% different areas of (- project &ana%e&ent i.e. soft'are#

syste&s inte%ration# co&&unications and hu&an resources can help project &ana%ers %ain the

experience# techni*ues and tools to &ana%e each sta%e of project. :y extendin% project


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&ana%e&ent concepts into the (- arena# the (- professionals can %ain an understandin% of the

strate%ies essential to handle (- projects of any siKe.


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Project 5oft'are O Iar/s

200!

Project &ana%e&ent infor&ation syste&s e.%.# an auto&ated tool# such as a schedulin%soft'are tool# a confi%uration &ana%e&ent syste an infor&ation collection and distribution

syste or 'eb interfaces to other online auto&ated syste&s".

5e*uencin% can be perfor&ed by usin% project &ana%e&ent soft'are. A project schedulenet'or/ dia%ra& can be produced by usin% project &ana%e&ent soft'are. -he Esti&ate Activity+urations process re*uires that the a&ount of 'or/ effort re*uired to co&plete the activity isesti&ated and the a&ount of resources to be applied to co&plete the activity is esti&ated theseare used to approxi&ate the nu&ber of 'or/ periods activity duration" needed to co&plete theactivity. All data and assu&ptions that support duration esti&atin% are docu&ented for eachesti&ate of activity duration. ost project &ana%e&ent soft'are for schedulin% 'ill handle thissituation by usin% a project calendar and alternative 'or/,period resource calendars that areusually identified by the resources that re*uire specific 'or/ periods. (n addition to these*uencin% lo%ic# the activities 'ill be perfor&ed accordin% to the project calendar and the

appropriate resource calendars. Auto&ated schedulin% tools expedite the schedulin% processby %eneratin% start and finish dates based on the inputs of activities# net'or/ dia%ra&s#resources and activity durations. A schedulin% tool can be used in conjunction 'ith other project&ana%e&ent soft'are applications as 'ell as &anual &ethods. Project &ana%e&ent soft'arefor schedulin% provides the ability to trac/ planned dates versus actual dates# and to forecastthe effects of chan%es to the project schedule.

Project &ana%e&ent cost esti&atin% soft'are applications# co&puteriKed spreadsheets#si&ulation# and statistical tools are beco&in% &ore 'idely accepted to assist 'ith costesti&atin%. 5uch tools can si&plify the use of so&e cost esti&atin% techni*ues and therebyfacilitate rapid consideration of cost esti&ate alternatives. Project &ana%e&ent soft'are is oftenused to &onitor the three E


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Phases of a Project O Iar/s

200L

Project phases are divisions 'ithin a project 'here extra control is needed to effectively &ana%ethe co&pletion of a &ajor deliverable. Project phases are typically co&pleted se*uentially# but

can overlap in so&e project situations. -he hi%h level nature of project phases &a/es the& anele&ent of the project life cycle. A project phase is not a project &ana%e&ent process %roup.

-he phase structure allo's the project to be se%&ented into lo%ical subsets for ease of&ana%e&ent# plannin% and control. -he nu&ber of phases# the need for phases and the de%reeof control applied depend on the siKe# co&plexity and potential i&pact of the project. e%ardlessof the nu&ber of phases co&prisin% a project# all phases have si&ilar characteristics>T When phases are se*uential# the close of a phase ends 'ith so&e for& of transfer or handoffof the 'or/ product produced as the phase deliverable. -his phase end represents a naturalpoint to reassess the effort under'ay and to chan%e or ter&inate the project if necessary. -hesepoints are referred to as phase exits# &ilestones# phase %ates# decision %ates# sta%e %ate or /illpoints.

T -he 'or/ has a distinct focus that differs fro& any other phase. -his often involvesdifferent or%aniKations and different s/ill sets.T -he pri&ary deliverable or objective of the phase re*uires an extra de%ree of control to besuccessfully achieved. -he repetition of processes across all five process %roups# as describedin Chapter G# provides that additional de%ree of control# and defines theboundaries of the phase.

Althou%h &any projects &ay have si&ilar phase na&es 'ith si&ilar deliverables# fe' areidentical. 5o&e 'ill have only one phase# other projects &ay have &any phases. +ifferentphases typically have a different duration or len%th.-here is no sin%le 'ay to define the ideal structure for a project. Althou%h industry co&&onpractices 'ill often lead to the use of a preferred structure# projects in the sa&e industryXor

even in the sa&e or%aniKationX&ay have si%nificant variation. 5o&e or%aniKations haveestablished policies that standardiKe all projects# 'hile others allo' the project &ana%e&enttea& to choose the &ost appropriate for their individual project. 7or instance# one or%aniKation&ay treat a feasibility study as routine pre,project 'or/# another &ay treat it as the first phase ofa project# and a third &i%ht treat the feasibility study as a separate# stand,alone project.i/e'ise# one project tea& &i%ht divide a project into t'o phases 'here a different project tea&&i%ht choose to &ana%e all the 'or/ as a sin%le phase. uch depends on the nature of thespecific project and the style of the project tea& or or%aniKation


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What are the &ain aspects to be considered in technical analysis of a project? OI ar/s

200!#200L

TEC0NICAL APPRAISAL % ANALYSIS$omes under the domain of technical or en"ineerin" e)perts.

asically involves technical appraisal of "iven project.:A5(C PAAE-E5

Plant capacity

Product Mi)

Manufacturin" Process % 6echnolo"y

6echnical arran"ements

Materials and inputs

>ocation and site.

*nvironmental aspects

$ivil works and structures

Machinery and *uipment

Plant layout & project charts

Project implementation schedule

$onsiderin" alternatives.

a. PA3- CAPAC(-4Plant capacity has to #e decided only after careful consideration of followin" aspects:

*conomies of scale % 6echnolo"y reuirement 'luminum smelter or cement

plant(

/nput constraints

/nvestment costs: $@A $B',@%,B(C

Market Potential

1esources at the disposal of the firm

-overnment Policy

b. P9+=C- (

/s "uided #y market forces

Should #e aimed at ma)imizin" the profits e.". soap manufacturin".

Production facilities should #e planned to allow fle)i#ility in product mi) to

adjust to chan"in" market conditions. ppropriate trade off #etweenadditional investment and fle)i#ility in product mi) is necessary.

c. A3=7AC-=(38 P9CE55 D -EC@39984For many products+ two or three alternative processes are availa#le:

!M6 versus P6 route for the manufacture of polyester or P*6 is a well

known controversy.

Steel: last furnace+ *lectric rc Furnace 1oute

!ry process versus wet process for portland cement manufacturin".

Solvent e)traction plants could use #atch process or continuous process+


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1efinin" could #e mechanical refinin" or chemical refinin".

io7diesel could #e produced from ve"eta#le edi#le or non7edi#le oils

C@9(CE 97 -EC@39984$hoice of technolo"y is "overned #y:

o Plant capacity 'at least DEE 6P! for cement plant usin" rotary kiln

otherwise vertical shaft technolo"y(o Major inputs

o Project cost and cost of production

o Successful use #y other units

o Product mi) includin" #yproducts

o >atest developments

o *asy adapta#ility

o *co7friendly?

o ppropriate 6echnolo"y for local conditions

d. -EC@3(CA AA38EE3-5 ppropriate arran"ements for technical know how for the manufacturin"

process are pre7reuis

project mgmt theory

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