Project Planning: Economic Evaluation.

1. Project Planning: Economic Evaluation. José Onofre Montesa Andrés Universidad Politécnica de Valencia Escuela Superior de Informática Aplicada 2003-2004

2. Now that we have the temporal project plan to answer to: What will be done?, Who will do it?, When will it be done? And, What are the necessary resources? We still have to answer: How much will it cost? How will the resource “capital” be applied? Goal. GpiI-2F Project Planning: Economic Evaluation.

3. Why? • Money is important in the enterprise world. • Our projects live in this context. • Enterprises have a lot of projects, and the cost is an important criteria. GpiI-2F Project Planning: Economic Evaluation.

4. We have the project program. We have the applied resources at every instant. TAREAS Especificar Necesidades Tarea: Diseño Programas Recursos: … Duración: 4 semanas Tarea: Codificación Program. Recursos: … Duración: 7 semanas Diseño Programas Diseño Base de Datos Tarea: Especifica Necesidades Recursos: … Duración: 2 semanas Tarea: Pruebas Recursos: … Duración: 2 semanas Realización Esquema Codificación Programas Tarea: Realización Esquema Recursos: … Duración: 1 semanas Tarea: Diseño B.D. Recursos: … Duración: 2 semanas Pruebas 0 2 4 6 8 10 12 14 16 SEMANAS The starting point... GpiI-2F Project Planning: Economic Evaluation.

5. Steps when creating the economical study. • Cash-flow calculation: • Unitary valuation of each resource, • Calculating the payment flow, • Calculating the income flow, • Obtaining the cash-flow. • Financial study: • Total volume of found to assign, • Cash-flow present value. GpiI-2F Project Planning: Economic Evaluation.

6. The costs from the project point of view. • Directs: • The ones that can be clearly assigned to the project. For instance: • Worked hours, consumed office materials... • Indirects: • It’s not easy to evaluate the added value to the project, they are usually fixed in the enterprise. For instance: • Electricity, telephone... GpiI-2F Project Planning: Economic Evaluation.

7. Unitary cost valuation of every resource. • It must be applied all the project cost. • Direct cost are easier to assign. • Indirect cost are assigned as weigh up of direct cost. • In this way we have an assigned cost of developers and not only they direct cost. GpiI-2F Project Planning: Economic Evaluation.

8. We start by fixing the payment periodicity: Days, weeks o Months. We group the use of resources by periods, (double entry table) resource, periods. Obtaining the cash flow in a project. GpiI-2F Project Planning: Economic Evaluation.

9. Calculating the payment flow. • Sequence the project payment: • Per resource consumption. • Per each period. Project GpiI-2F Project Planning: Economic Evaluation.

10. For each period we accumulate the total resources use multiply by it’s cost. Obtaining the payment flow: GpiI-2F Project Planning: Economic Evaluation.

11. Accumulated payment representation (S). GpiI-2F Project Planning: Economic Evaluation.

12. Project Calculating the income flow. • Set of received incomes by the project development enterprise. GpiI-2F Project Planning: Economic Evaluation.

13. Obtaining the income flow. • For each period we accumulate the total received incomes. GpiI-2F Project Planning: Economic Evaluation.

14. Obtaining the cash-flow. • It’s obtained subtracting the payment flow to the income flow. • It’s call cash-flow because if you represent mentally a cash machine for the project, it is the flow that you can see. GpiI-2F Project Planning: Economic Evaluation.

15. Calculate the cash flow in the next project. GpiI-2F Project Planning: Economic Evaluation.

16. Taking into account: • Analysts costs is: • 400 Euros per period. • Programmers cost is: • 200 Euros per period. • The developer enterprise will receive 10.000 Euros at the end of task J. GpiI-2F Project Planning: Economic Evaluation.

17. Graphic representation. GpiI-2F Project Planning: Economic Evaluation.

18. Financial study : • Money isn’t easy to get in the enterprise, • It’s always compared with the opportunity cost. • This leads us to have to observe the project from two points of view: • Total volume of funds to assign, • Updated cash flow. GpiI-2F Project Planning: Economic Evaluation.

19. Total volume of funds to assign. • All projects are taken into account in the financial activity of the enterprise: • They are capital expense, return and • some needs in order to afford the payments. • We must show the foreseen payments to be inserted in the enterprise reality. GpiI-2F Project Planning: Economic Evaluation.

20. Total volume of funds to assign, Example: • We have a clear business, • We must paid 20.000 euros each week during one year, • We will obtain 4.000.000 euros at the end of the year, • There are no risk. • The business seems clear to everyone. • Do you think that it’s possible? • It´s hard to achieve GpiI-2F Project Planning: Economic Evaluation.

21. In this case: How much money does the enterprise have to dispose? GpiI-2F Project Planning: Economic Evaluation.

22. In this other case: How much money does the enterprise have to dispose? GpiI-2F Project Planning: Economic Evaluation.

23. How much capital can we use in order to afford the project? Are euros equals: in one month and the next? What about the risk? We will do the same job, but, which is the best option? GpiI-2F Project Planning: Economic Evaluation.

24. Updated cash flow. • In order to compare the profitability all the projects need to have the same conditions. • Several methods are used: • Net Present Value: NPV • Return On Investment: ROI • Internal Rate of Return: IRR • We will use the NPV. GpiI-2F Project Planning: Economic Evaluation.

25. Money don’t have the same value now and in the future, and even they have the same value, lending money have a risk and the lender ask for a rate. We call rate to: in %: the 10% The rate “i” GpiI-2F Project Planning: Economic Evaluation.

26. Putting an amount in any moment. • The present value at the end of the first period is: • The future value in the n period is : • By induction. GpiI-2F Project Planning: Economic Evaluation.

27. Comparing between the cash-flow and the NPV GpiI-2F Project Planning: Economic Evaluation.

28. The accumulated in a project. GpiI-2F Project Planning: Economic Evaluation.

29. The effects of delays in a project • Supposing there is a delay in the project: • How does it affect the cash-flow? • How does it affect to the updated cash-flow? • How does it affect the updated accumulated cash-flow? GpiI-2F Project Planning: Economic Evaluation.

30. Bibliography • Romero, C. Tecnicas de Gestión de Empresas. CEPADE / Mundi-Prensa, 1993. (Capítulo 2: Evaluzación financiera de proyectos de inversión). • DeMarco, Tom. Controlling Software Projects. Prentice Hall, 1982. • Page-Jones, Meilir. Practical Project Management, Dorset House, 1985. • Shtub, A., Bard, J.F. ,Globerson, S., PROJECT MANAGEMENT, Engineering, Technology and Implementation, Prentice Hall International, 1994. (Capítulos 2 y 3: Engineering Economic Analysis; Project Screening and Selectión) • Uriegas Torres, Carlos. Análisis Económico de Sistemas en la Ingeniería, Limusa, 1987 GpiI-2F Project Planning: Economic Evaluation.