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Estimates of project costs and benefits

by: Samia Notetaker

Estimates of project costs and benefits IS 378

Marketplace > University of Nevada - Las Vegas > Information System > IS 378 > Estimates of project costs and benefits
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Chapter 4 notes and study guide please take a look. Good luck :)
Project Management
Dr. Reza Torkzadeh
Study Guide
#project management, #business, #unlv, #leebusiness, school, #exam, 1, #fall, #2016
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This 8 page Study Guide was uploaded by Samia Notetaker on Sunday September 25, 2016. The Study Guide belongs to IS 378 at University of Nevada - Las Vegas taught by Dr. Reza Torkzadeh in Fall 2016. Since its upload, it has received 8 views. For similar materials see Project Management in Information System at University of Nevada - Las Vegas.


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Date Created: 09/25/16
Project Costs 1.Cost Estimates a. Total Cost of a project is based on the aggregate cost of work units discounted on the work breakdown schedule i. It is easier to estimate and assign cost to a work unit than the whole project ii. There are situations where a project cost estimates is needed for approval before work breakdown schedule is done 1. Aggregate-parts broken down with cost associated with it and determining cost of project 2. Cant breakdown= work unit start with it and add all up to get total cost 2.Types of Costs a. Tangible-easier to estimate i. Example- parts, equipment, hardware, software, and human resources b. Intangible-difficult to evaluate i. Example-cost benefit analysis of offshoring or outsourcing project activities in terms of security, privacy, loss of knowledge, and innovation c. Direct- associates with a work unit i. Example- hours worked on a unit or a portion of management time spend on a work unit d. Indirect-difficult to assign i. Ex- promotional expenses for the entire organization difficult to transfer this cost to a work unity or to a project. Project Value Analysis 1.The 3 important estimates project a. Payback analysis b. Net Present Value c. Return on Investment 2.Payback Analysis a. The payback period is the length of time that it takes to recover the amount of money invested in a technology i. How long does it take project to turn into revenue ii. How quickly costs of a project are recovered and how soon a project starts generically benefit? iii. Starts when benefits users iv. Pay attention to figure 4.1 on pg. 63 1. Cumulative rollover from previous year and difference 2. You’d pick project B because it turns into positive revenue sooner 3. Project B has $500,000 revenue in year 3 while project A has $1000 in revenue in year 4 Net Present Value 1.What is it? a. This approach uses a rate of interest to calculate the present value of the future cost and benefit for a project. The rate of interest used is based on the cost of capital b. Based on the calculation of expected cash flow. Projects should reflect positive cash flow to be considered for development i. Interest value of project c. Formula i. On pg. 62 in book ii. Where t represents the year in which cash flow occurs. A represents the amount of cash flow for that year, and r represents the discount rate (interest rate) d. Using a specified rate of interest, this formula sums up the present value for the number of years that estimates have been made e. Example- figure 4.2 and 4.3 on pg. 63 Return on Investment 1.What is it? a. Used to decide the relative wroth of a project b. Return on investment is calculated as discounted benefits (revenue) minus discounted costs divided by discounted costs multiplied by 100 c. Pay attention to figure 4.4 and 4.5 on pg. 64 d. Firms use all 3 methods to determine which project to use 2.Caution a. There is a risk in using a single measure to evaluate the potential contribution of project, evaluate the 3 techniques presented. 3.Cost estimates a. Necessary for Allocating resources Monitor progress Control quality Maintain team Award merit Ultimately ensure project success Have to have right estimates 4.Sources of estimates a. 3 ways of obtaining estimates i. Experience ii. Documentation 1. For previous files and adjust for inflation iii. Expert opinion b. Expirencee-from people in the organization considers workplace culture, talent pool, interorganizational relatives, and human resource policies i. Overestimation ii. Underestimation iii. Safe estimation c. Documentation-from archives of previous projects Relatively current Similar project’s Free from bias and politics Based on actual recorded numbers Adjustments may be necessary if changes have occurred since document was prepared, new laws new equipment, change in working hours and holidays. d. Expert Opinion-widely used and includes a pool of internal and external experts Similar to experience in pros and cons Used for new project where little record exists More formalized and expensive May require visits by external experts and sharing of information. Multiple Estimates 1.Considerations a. Based on history and expirencee, project managers may adjust estimates given by individuals this in turn may result in further adjustment (overestimation or underestimation) by those providing estimates i. This cycle creates “game play” and nonproductive environment b. Use work units and bottoms up approach c. Define clearly work units and task d. Avoid memory recollection i. From you or someone else 2.Multiple estimates a. Obtain multiple estimates i. Best case scenario ii. Most probable scenario 1. Put more weight on the 2 iii. Worst case scenario 1. Take average of all 3 iv. Example in the video pay attention to it b. Assign weights to these estimates c. Use average scores and variables d. Provide contingency resources for estimates with large variance e. Calculate upper limit and lower limit to measure project duration f. Example- A project is estimated to take 16 hours to complete with a standard deviation of 29 hours. Assuming + and – 3 standard deviations we will have i. 90 % of curve 3.Phase estimators a. Sometimes due to uncertainty estimates are feasible for initial phase day b. Only rough estimates of subsequent phases are initially feasible c. Project development life cycle (initiation, planning, development, implementation, closure) can be the use for phase estimation d. Project owners and sponsors must commit to a project with incomplete info about cost and time. Not always an easy situation 4.Phase Considerations a. Estimators are used to request funding, make decisions, schedule, negotiate, set goals, evaluate performance, etc. b. Event happen, technology advances, priorities change, and biases creep in i. Long-term planning c. Methods, their appropriateness, strengths, and weaknesses must be explained d. Assume normal conditions-free from extreme case assumption 5.Contingency Planning a. For out of the ordinary situations funds should be set aside at the planning phases of a project development life cycle i. Emergency happens just in case something happens b. Documentation and communicate around contingency situation is crucial c. Such funds are not directly accessible by project manager d. Simply adding a margin to estimates must be avoided. Risk Analysis 1. What is it? a. Appropriate where there is uncertainty regarding activity duration b. Leads to developing alternative responses c. Includes predictions or likelihood of happening d. Includes estimate or risk impact e. Depending on the nature and size of a project it could be more or less extensive. Detailed or formalized f. Leads to a change management process 2.Change Management a. Change is beneficial- innovative ideas or suggestions are often made by team members b. A change management committee can facilitate and encourage change proposals i. People from different departments c. With the approval of management, additional resources can be provided through contingency funds d. Change may also become necessary for external reasons such as change related to the competition, vendors, and law 3.Responsibility of change Committee a. Establish guidelines for change proposal b. Develop and communicate criteria for the evaluation of proposed change. c. Evaluate and approve change d. Ensure compliance e. Changes must be consistent with overall goals f. Objectives of the organization and broad scope of project g. Reasons to change request must be timely especially for time- sensitive changes h. Proposals to drastically change a project may replace the project with new one.


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