NPV,IRR,ROI

Marginal Costing Marginal cost is ‘The cost of one unit of product or service that would be

avoided if the unit were not produced, or that would increase if one extra unit were produced'.

Contribution is 'Sales value less variable cost of sales i.e if the volume of sales falls by one item, the profit will fall by the amount of contribution earned from the item.

SALES = VARIABLE COST+FIXED EXPENSES (+/-)PROFIT/LOSS SALES-VARIABLE COST = FIXED EXPENSES (+/-)PROFIT/LOSS (SALES - VARIABLE COST) IS MARGINAL CONTRIBUTION

When a unit of product is made, the extra costs incurred in its manufacture are the variable production costs. Fixed costs are unaffected, and no extra fixed costs are incurred when output is increased.

1

Cost-volume-profit analysisProfit of firm are result of many factors such as: Selling prices, Volume of

sales, Unit variable cost, Total fixed cost, Combination in which the various product lines are sold etc.

Why CVP analysis : To do effective planning and analyze what is effect by changing these factors.

CVP analysis uses techniques of:Break-even analysis.Profit-volume analysis .

Break-even analysisBreakeven point is a level of activity at which the total revenue is equal to the

total costsAt this level, the company makes no profitBreak even formula:Break even sales(units)= fixed cost/contribution margin per unit

Break even sales(volume)=fixed cost / c/s ratio

Break even sales volume=total fixed expenses/ 1-totalvariable expenses/total sales volumeCash break even point(units)=cash fixed cost/cash contribution per unit

Margin of Safety

Margin of safety=Profit /(P/V)ratio = Profit X sales/sales – variable cost

Angle of incidence

Sales formula sales= Fixed cost +Variable cost+Profit sales=(Profit + Fixed cost)/p/v ratio

4

Question

A company producing a single article sells it at Rs. 10 each. The marginal cost of production is Rs. 6 each and fixed cost is Rs. 400 per annum. Calculate—(a) the P/V ratio;

(b) the break-even sales; (c) the sales to earn a profit Rs.500; (d) profit at sales Rs. 3000; (e) new break even point if sales price is reduced by 10%.

Solution(a) P/V ratio : P/V ratio = Contribution = 4 = 40%

Sales 10

(b) Break-even sales : Sales at B.E.P. = Fixed cost = 400

P/V ratio 40% =Rs.1000 (or 100 units)

(c) Sales at profit Rs. 500 : Fixed cost + profit P/V ratio

=900/40%=Rs. 2250

Contd..(d) Profit at sales Rs. 3000: Contribution at sale Rs. 3000 = Sales X P/V ratio

= Rs. 3000 X 4/10 = Rs. 1200 Profit = Contribution – Fixed Cost = Rs. 1200 - Rs.400 = Rs. 800 (e) New P/V ratio = Rs. 9 - Rs.6 = 1/3

Rs. 9 Sales at B.E.P. ═ Fixed Cost PVR = Rs. 400x3 = Rs. 1200

CH 4

Project Initiation

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Project Initiation

Before a project manager begins working on a project, he or she needs to understand how and why the organization decided to spend valuable resources-money and time-on the project.

You will understand the project management initiation process when you can

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Objectives Define the project initiation process group, with

all its component processes and deliverables Understand why selecting the right projects to

work on is important and sometimes difficult for an organization

Understand the importance and contents of a project charter and the stakeholder assessment matrix

Understand how to conduct a project kickoff meeting

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Objectives

Understand the importance and contents of a project charter and the stakeholder assessment matrix

Understand how to conduct a project kickoff meeting

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Objectives Learn the tools and techniques of project

selection, including:1. The strategic planning process for the organization

and IT department2. Quantitative methods, including the following:

1. Return on investment (ROI)2. Net present value (NPV)3. Internal rate of return (IRR)4. Payback analysis

3. Qualitative methods4. Balanced scorecard5. Real options6. The weighted scoring model (WSM)

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Strategic Planning and Project Selection

The first step before initiating projects is to look at the big picture “systems approach” or strategic plan of an organization

Strategic planning involves determining long-term business objectives (long-term?)

IT projects should support strategic and financial business objectives

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Projects authorized as a result of:

A market demand An organizational need A customer request A technological advance A legal requirement

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Identifying Potential Projects Organizations should follow a documented

consistent planning process for selecting IT projects

1. First, develop an IT strategic plan in support of the organization’s overall strategic plan

2. Then perform a business area analysis3. Next, define potential projects, build the business

case4. Finally, select IT projects and assign resources

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Four Key Issues Needing Answers for All Technology Projects

1. Business Value2. Technology3. Cost/Benefit questions4. Risk

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1. Business value- IT project managers must look at a project from a

business perspective by identifying what business process(es) will be most affected.

They must understand the process thoroughly and the impact the project will have on these processes.

They must also understand what impact the project will have on associated processes.

Using the systems approach assists in learning what impact a project will have on all parts of the organization.

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2. Technology- The technology used for a project needs to be well

tested, scalable, secure, modifiable, and usable. Has the technology been used in the organization

before, and do we have experience with it? What technology is the competition using, and how

might technology allow this organization to see what works and doesn't work in their specific industry?

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3. Cost/benefit questions- An organization needs to understand whether

the complete costs-including acquisition, development, and ongoing support costs-of the project outweigh its benefits.

.

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4. Risk- IT project managers must do a thorough risk

assessment for the project. They must know what kinds of issues or problems

might surface during the project such as the software vendor going out of business in the middle of the project or funding for the project being cut in half during execution-

and be sure to have appropriate safeguards or workarounds in place so the project can still be completed

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Methods for Selecting Projects In every organization, there are always more

projects than available time and resources to implement them

Very important to follow a repeatable and complete process for selecting IT projects, to get the right mix (portfolio) for the organization

Business case – a document composed of a set of project characteristics (costs, benefits, risk, etc.) that aid organization decision makers in deciding what projects to work on

Slide 4 - 22

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Business Case Contents of the business case may include:

Key business objectivesMethods and sources used to obtain informationBenefits to the organization if the project is

successfulConsequences if the project is not doneFull life-cycle costsQualitative modelsQuantitative modelsRisks

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Business Case Development

Developed by multiple people (Subject Matter Experts) representing all key stakeholders

Benefits to having the right team:CredibilityAccuracyThoroughnessOwnership

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Credibility-Credibility is achieved because the information comes from many different sources, allowing for checks and balances.

• Accuracy-Accuracy is improved for the same reasons as credibility, as well as the fact that the information comes from the people who are best equipped to provide it. For example, to get salary data for key resources needed

for the project, you go to the human resources department, which can provide the basic salary data plus overhead rates (insurance, vacation, and so on), or to get market impact, you solicit input from the marketing and sales department.

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• Thoroughness-Thoroughness is aided by this approach if all team members are allowed input into the process.

• Ownership-It's important that IT projects not be viewed as solely the property of the IT department. All stakeholders from all affected departments need to feel like part of the process and take some ownership in making sure the project is successful.

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Business Case Example from

Text Case Study

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Selecting the Wrong ProjectsThere are five major reasons why organizations

choose the wrong projects: bias and errors in judgment, failure to establish an effective framework for

project portfolio management, lack of the right metrics for valuing projects, inability to assess and value risk, and failure to identify project portfolios on the

“efficient frontier”

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CAUTION: “IT IS BETTER TO MEASURE GOLD ROUGHLY THAN TO COUNT PENNIES PRECISELY”

Before moving on to building the business case and the project selection tools….

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Strategic Planning A formal document that outlines an

organization’s 3 to 5 year mission, vision, goals, objectives, and strategies

The main goal of any project should be to deliver some form of business value: higher market share, new product or market, better customer support, higher productivity, lower operating costs, etc.

All of these are typically defined in the company’s strategic plan as goals and objectives. Listed next to each goal or objective is a list of strategies which will fulfill the objective

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Strategic Planning

The development of strategies (projects) must focus on what is needed to meet the strategic plan’s goals and objectives

A question that is often asked - “Does the proposed project deliver a product or service which was defined as an objective on the strategic plan?”

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Strategic Planning

An often used tool to build the strategic plan is called SWOT analysis. An information gathering technique to evaluate external influences against internal capabilitiesStrengthsWeaknessesOpportunitiesThreats

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Strategic Planning

• Strength- A strength is an organizational resource

(money, people, location, equipment,IT) that can be used to meet an objective. .

• Weakness- A weaknesses is a missing or limited resource

that bears on the organization's ability to meet an objective. .' .

.

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Strategic Planning

• Opportunity- An opportunity is a circumstance that may

provide the organization a chance to improve its ability to compete. . .

• Threat- A threat is a potentially negative circumstance

that, if it occurs, may hinder an organization's ability to compete

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Strategic Planning

Because today's organizations face an ever-growing number of opportunities and threats, they must be able to successfully execute multiple proJects multiple departments.

A technique that assists orgamzations managing multlple projects is called portfolio management.

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Strategic Planning

IT project portfolio management organizes a group of IT proJect into a single portfolio consisting of reports that capture project goals,. costs, time lines, accomplishments, resources, risks, and other critical factors.

Chief Information Officer (CIOs) and other IT managers can then regularly review entIre portfolios, allocate resources as needed, and adjust projects to produce the highest returns.

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Selection Tools Qualitative Models

Subject matter expert judgments“Sacred Cow” Mandates

Quantitative ModelsNet Present Value (NPV)Internal Rate of Return (IRR)Return on InvestmentPayback Period

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Subject Matter Experts

SMEs are individuals either within a company or outside the company who possess expertise or unique knowledge in a particular facet of the business, either because of work experience, education, or a combination of the two.

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SMEs

SMEs can evaluate projects with or without more complex quantitative models and can categorize projects with low, medium,and high priority rankings.

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SACRED COW

Sacred cow decisions are made because someone-generally in upper management really wants a particular project to be done.

These decisions are not always in the best interest of the organization but of one individual or a group.

Unfortunately, many organizations still operate today using this method.

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SACRED COW

The scenario usually goes something like this: • A senior manager from a non-IT department

picks up a trade magazine and reads about show all the best companies are doing XYZ to be competitive. He then schedules a meeting with an IT manager and explains that XYZ is something we have to implement.

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SACRED COW

• The IT manager, not knowing any better launches a project, gathers resources, and begins to operate under the directive to "get it done ASAP."

• Other projects that these individuals are working on are all delayed, as they work on the "sacred" one.

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Mandates

Mandates can come from vendors, government agencies, industry sectors, or markets.

Vendors may in the case of computer software release a new version and stop support for previous versions: You either upgrade or risk losing support.

Some vendor contracts stipulate that you will keep the software current.

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Mandates

A project may be mandated by key customers. Many consumer goods retailers are mandating that all suppliers be capable of conducting business-including orders, shipping information, and inventory control-completely electronically.

If your company doesn't have this capability but wants to do business with the customer, you will be required to add these capabilities.

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Qualitative Models Subject matter expert (SME) judgments

Individuals either within the company or outside the company who possess expertise or unique knowledge in a particular facet of the business either by work experience, education, or a combination of both

SME’s can be used to evaluate projects with or without more complex quantitative models and categorize projects with low, medium, and high priority rankings

“Sacred Cow” “Sacred Cow” decisions are made because someone –

generally in upper management – really wants the project to get done

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Qualitative Models

MandatesGenerated from vendors, government agencies,

industry sectors, or markets

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QUANTITATIVE MODELS

QUANTITATIVE MODELS Every IT project will have some level of

financial benefit to the organization as well as some level of cost. The bottom line is that IT projects cost money.

The reason we create financial models for project selection analysis is simply to ascertain whether the benefits outweigh the costs and to what degree

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Quantitative Models Financial considerations are often an

important factor in selecting projects but not always!

Four primary methods for determining the estimated financial value of projects:Net present value (NPV) analysisReturn on investment (ROI)Payback analysisInternal Rate of Return (IRR)

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Time Value of Money

A sum of money is more valuable the sooner it is received. A dollar today is worth more than the promise of a dollar tomorrow

Due to: Inflation and risk Before you invest money in a project you must

compare its rate of return against other opportunities (other projects)

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Time Value of Money FV = PV(1 + i)n

Where: FV = Future Value of an investment (project) PV = Present Value of that same investment i = Interest rate, discount rate or cost of capital n = Number of years

Example: Invest $1000 today (PV) for 1 year(n) at an interest rate of 10% (i), the investment is worth $1000(1+.1)1 or $1210 at the end of year one

What happens when you have two different investments with varying rates of return?

You must find a way to put both on equal terms. <next slide>

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Time Value of Money You put both on equal terms by changing the formula

slightly to evaluate all future cash flows at time zero or todayPV = FV (1+i)n

Example: You have a project that promises you $1000 of profit at the end of the first year with the discount rate at 10%

PV = $1,000 = $909 (1+0.1)1

The project is worth only $909 today

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Net Present Value Analysis

NPV is a method of calculating the expected net monetary gain or loss from an investment (project) by discounting all future costs and benefits to the present time

Projects with a positive NPV should be considered if financial value is a key criterion

Generally, the higher the NPV, the better

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NPV is one of the most often used quantitative models for project selection.

NPV is a method of calculating the expected net monetary gain or loss from an investment (project) by discounting all future costs and benefits to the present time.

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If the NPV turns out to be a positive value, the project has surpassed the cost of capital or return available by investing the same money in other ways.

All other project characteristics being equal, the project with the highest NPV should be chosen.

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NPV Example

NPV is calculated using the following formula:NPV = ∑t=0…n CF/ (1+i)t

Where t = the year of the cash flow

n = the last year of the cash flowCF = the cash flow at time ti = interest rate or discount rate

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NPV Example CalculationsDo the Math Discounted Cash Flow

Project 1

Year 0 ($120,000) ($120,000)

Year 1 ($40,000) / (1 + .08)1 ($37,037)

Year 2 $25,000 / (1 + .08)2 $21,433

Year 3 $70,000 / (1 + .08)3 $55,569

Year 4 $130,000 / (1 + .08)4 $95,553

Year 5 $80,000 / (1 + .08)5 $54,448

NPV Add them up $69,966

Project 2

Year 0 ($75,000) ($75,000)

Year 1 ($5,000) / (1 + .08)1 ($4,630)

Year 2 $70,000 / (1 + .08)2 $60,014

Year 3 $45,000 / (1 + .08)3 $35,723

Year 4 $30,000 / (1 + .08)4 $22,051

Year 5 $5,000 / (1 + .08)5 $3,403

NPV Add them up $41,561

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Internal Rate of Return (IRR)

IRR is similar to NPV in process but is slightly more difficult to calculate.

The IRR is the discount rate at which NPV is zero.

Finding an IRR solution involves trial and error: You keep plugging in different discount rates and see which one drives the NPV to zero.

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Internal Rate of Return (IRR)

You can compare the IRR value to other projects or to a company standard to see which projects should get priority. If the organization has set a minimum value of 8 percent and the project IRR is 15 percent, you have a positive situation, and you should do the project.

If the project IRR turns out to be 6 percent, you should not do the project

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Internal Rate of Return (IRR) One of the more sophisticated capital budgeting

techniques and also more difficult to calculate The IRR is the discount rate at which NPV is zero Or the Discount rate where the present value of the

cash inflows exactly equals the initial investment. IRR is the discount rate when NPV = 0

Most companies that use this technique have a minimum IRR that you must meet.

Basically trial and error changing the discount rate until NPV becomes zero

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Return on Investment (ROI) Return on investment (ROI) is income divided

by investment ROI = (total discounted benefits – total discounted

costs) / total discounted costs The higher the ROI or higher the ratio of

benefits to costs, the better Many organizations have a required rate of

return or minimum acceptable rate of return on investment for projects

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ROI Example

Step 1: determine discount factor for each year.Step 2: calculate discounted benefits and costs

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ROI Example

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ROI Example ROI Project 1 = ($436,000 - $367,100) / $357,100

= 19% ROI Project 2 = ($335,000 - $256,000) / $256,000

= 31%

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Payback Period The payback period is the amount of time it will take

a project before the accrued benefits surpass accrued costs, or how much time an investment takes to recover its initial cost.

As with the other quantitative models, many organizations have a maximum number in mind that all projects must meet or beat.

If an IT project has a payback period of four years but the organization demands two years, then either you won't be allowed to proceed with the project or you must make adjustments to change the equation .

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Payback Period

The payback period ignores the time value of money but offers a glimpse at the potential risk associated with each of the projects.

A longer payback period generally infers a riskier project.

The longer it takes before a project begins to make money for the organization,the greater the chances that things can go wrong on the project

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Payback Analysis The payback period is the amount of time it will

take a project before the accrued benefits surpass accrued costs or how much time an investment takes to recover its initial cost

track the net cash flow across each year to determine the year that net benefits overtake net costs (not discounted cash flows)

Many organizations want IT projects to have a fairly short payback period (< 1 year)

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Payback Example Same numbers as earlier examples. Table shows net cash

flows Project 1 payback occurs sometime during year 4 Project 2 payback occurs sometime during year 3

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Selecting a Portfolio of Projects

We have reviewed several methods for evaluating individual projects…. Now lets move on to selecting our entire portfolio by comparing projects against each other using a weighted scoring model

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Weighted Scoring Model (WSM) The weighted scoring model (WSM) is a

culmination of all of the other models discussed in this chapter

It is used to evaluate all projects on as equal a basis as is humanly possible. It attempts to remove human bias in the project selection process

The criterion used to compare projects differs from one organization to another and may differ between types and classes of projects within the same organization

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Process to Create WSM1. First identify criteria important to the project

selection process2. Then assign weights (percentages) to each

criterion so they add up to 100%3. Then assign scores to each criterion for each

project4. Multiply the scores by the weights and get

the total weighted scores

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Weighted Scoring Model Example

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Other Methods to Determine Value

Balanced Scorecard Real Options

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Balanced Scorecard Drs. Robert Kaplan and David Norton developed

this approach to help select and manage projects that align with business strategy

A balanced scorecard converts an organization’s value drivers, such as customer service, innovation, operational efficiency, and financial performance to a series of defined metrics

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Balanced Scorecard Organizations record and analyze these metrics to

determine how well projects help them achieve strategic goals

The balanced scorecard measures organizational performance across four balanced perspectives: financial, customers, internal processes, and learning

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Balanced Scorecard

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Real Options Derives from a financial model considering the

management of a portfolio of stock investment options Has not yet become a very popular option for IT

investments A fundamental definition of an option is “the right, but not

the obligation, to buy (call option) or sell (put option) an investment holding at a predetermined price (called the exercise price or strike price) at some particular date in the future”

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Real Options A stock option lets us make a small investment today in

order to reduce our risk later on. At the same time, it keeps open the possibility of making a bigger investment later, if the future goes the way we expect

The more uncertain the times, the more valuable an options approach becomes

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Real Options In order to make real options easier to understand, T.A. Leuhrman

(1998) used the analogy of a tomato garden: In a tomato garden, not all the tomatoes are ripe at the same time; some are ready to pick right now, some are rotten and should be thrown away, and some will be ready to harvest at a later date

We can apply this line of thinking for evaluating investments.

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Real Options Traditionally, the evaluation of investments has been limited to a

yes/no “ripe or rotten” decision based solely on net present value. With real options, an investment with a negative net present value may still be good, but perhaps it’s just not the right time (it’s not ripe yet)

If you can delay until the proper time (now ripe) your once negative NPV net present value would reflect a positive one

Viewing an investment as an option allows projects to be evaluated and managed in respect to future value and a dynamic business environment

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Real Options

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Selection Summary This completes our section on project selection techniques.

As you can see, a variety of choices are available to help organizations become better at selecting the right projects

Many studies have been done to review the use and effectiveness of these techniques. The problem in trying to draw any conclusions from these studies is that they all address different industry segments, over different time periods, using different technologies

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Selection Summary The choice of which techniques to use is based on many

factors: company culture, financial position, industry segment, technology, length of project, size of project, and so on

Organizations should use a method that builds a WSM which consists of elements and weights that are pertinent to the organization at a point in time and circumstances

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Project Initiation

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Project Initiation

The projects have been selected, now time to begin

First project artifact is the Project Charter, butFirst we must do a stakeholder analysis

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Stakeholder Analysis Identifies the influence and interests of the

various stakeholders and documents their needs, wants, and expectations

These needs and wants form the basis of the scope statement described in Chapter 5

The influence and interests section of the analysis can make the PM job much easier and lead to more successful projects

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Old Saying

“If you know the enemy and know yourself, you need not fear the result of a hundred battles.

If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.

If you know neither the enemy nor yourself, you will succumb in every battle”

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Stakeholder Analysis Process1. Identify all potential stakeholders2. Determine interests, expectations, and

influence for each3. Build a stakeholder assessment matrix (see

Figure 4-5)4. Analyze appropriate stakeholder approach

strategies and update the matrix5. Update throughout the project

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Where to Look for Stakeholders

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Stakeholder Assessment Matrix

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Project Charter Is the first tangible work product created in all projects,

regardless of size and type After deciding what projects to work on, it is important

to formalize the project start A project charter is a document (legal) which formally

authorizes the work to begin on a project and provides an overview of objectives and resource requirements

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Project Charter Key project stakeholders should sign a project charter

to acknowledge agreement on the need and intent of the project

First project artifact placed under change control.

“Should” define Project Manager’s level of authority and responsibility

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Project Charter Best Practices

Should not be created in isolation It is not a novel, keep it short and to the point

Implementing an entire ERP application can be summarized in a project charter in 3 or 4 pages max

Tough to get stakeholder buy-in and understanding when the charter is 20 plus pages

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Sample Project Charter from Running Case Study

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Kick-Off Meeting With the completion of the stakeholder analysis

and the signing of the project charter, it’s time to schedule and conduct the kickoff meeting

First step, use the stakeholder analysis to make sure to invite the right people

Everyone at the start of the project hears the same message

Get agreement from everyone on Project Charter

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Summary of Process Steps1. Project sponsors prepare the business case2. Review potential project business cases3. Review current business climate4. Build the weighted scoring model5. Review available resources6. Select projects and assign project managers7. Conduct stakeholder analysis8. Create Project Charter9. Obtain Project Charter buy-in obtain signatures10. Conduct Kick-off meeting

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PROJECT SELECTION AND THE INITIATION PROCESS

This section describes the steps necessary to complete the selection process. The project selection process is as follows:

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Step 1. Project sponsors prepare the business case for the project, including qualitative and quantitative information, as appropriate or required by the organization. This is performed for each project being considered.

Step 2. The business cases for all the projects are collected by the organization's steering committee staff and separated into categories (research, mandates, strategic direction, market advantage, and so on). The projects can then be compared to others in the same categories. The categories are specific to the organization's industry and mission.

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Step 3. The steering committee meets physically or virtually to review the organization's strategic plan and current environment and economic situation. The plan may have been written as much as one or two years earlier, so before project decisions are made, the organization's current situation needs to be reviewed and evaluated.

Step 4. The steering committee builds a WSM for each project within each category, using the appropriate metrics

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Step 5. The steering committee reviews the resource availability needs of each project and compares them to what is currently available. It would be great to always select the best projects, but this might not be feasible if two projects require the same resource full time. The company must then decide not to do both projects or to acquire additional resources. If additional resources are acquired, the project cost structure must be updated.

Step 6. The steering committee selects the projects and commits the associated resources

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Step 7. The selected project manger conducts the stakeholder analysis, with aid from selected SMEs.

Step 8. The steering committee staff creates the project charter, with the aid of the selected project manager. The project manager should be picked based on the needs of the project. A complex critical project should have a senior project leader assigned, and a simple, non critical project should have a less senior project leader assigned. The project manager's experience should also be taken into consideration. If the project is to update the organization's accounting software, a project manager with accounting background should be selected

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Step 9. The project manager must get the project charter signed by the appropriate stakeholders, securing their support for the project.

Step 10. The project manager, in association with the project sponsor, conducts the kickoff meeting. Many organizations have the sponsor run the meeting and make the invitations to increase the visibility of the sponsor to all stakeholders.

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HOW TO CONDUCT THE PROJECT INITIATION PROCESS

Step 1: Preparing the Business Case

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Chapter Review

1. In most organizations, there are more projects than there are resources to support them. Organizations need to follow a disciplined project-selection process to ensure that they are working on the correct mix of projects.

2. IT professionals must lmderstand the systems context in which the project they are working on exists. The following four key issues will assist in understanding the business context: business value, technology,cost/benefit questions, and risks

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Chapter Review

3.A business case is a document composed of a set of project characteristics that aid organization decision makers in deciding what projects to work on. The key parts are objectives, methods and sources, benefits, consequences, costs, qualitative and quantitative models, and risks.

4. A project may be undertaken to fulfill an initiative as part of an organization's strategic plan. IT has become a strategic enabler of most or all of the items on strategic plans

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Chapter Review 5. Project selection techniques fall into two groups:

qualitative models and quantitative models. Qualitative models consist of relying on 5MB judgments, sacred cow decisions, and mandates. The quantitative models are NPY, IRR, ROI, and payback period.

6. The WSM is used to compare the merits of projects based on the organization's specific priorities, such as risk, financial concerns, strategic plan initiative, and competition. Each project is evaluated fairly, based on its relative score in the model

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Chapter Review

7. The balanced scorecard approach was developed in the early 1990s to enable companies to identify what they should measure in order to balance the financial perspective of the organization. The organization should be viewed from four perspectives: financial, customer, internal business process, and learning and growth.

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Chapter Review

8. Real options is a methodology that allows an organization to select a mix of projects derived from a financial model of managing a portfolio of stock investment options.

9. A stakeholder analysis is used to identify the influence and interests of the various stakeholders and documents their needs, wants, and expectations. This information will form the basis of the scope statement

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Chapter Review 10. A project charter is the key deliverable of the initiation

phase of every project, regardless of size. The charter officially recognizes the start of a project for all stakeholders. Once signed, the charter should be placed under configuration control. The charter consists of the project title and active date, the version number, a short project description, the project manager's name and authority level, project objectives, major deliverables, critical success factors, assumptions, constraints, risks, and key role responsibilities. The last section consists of key project stakeholder signatures, signifying their approval of the charter and thus the project.

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Chapter Review

11. The kickoff meeting is organized by the project sponsor to officially announce the start of the project. The project charter should be used to provide information for all participants. Many times, the key stakeholders are asked to sign the charter at the conclusion of the meeting.

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Glossary business case A document composed of a set of

project characteristics-costs, benefits, risks, and so on-that aids organization decision makers in deciding what projects to work on.

portfolio management Control and monitoring of an organization's mix of projects to match organizational objectives for risk and investment returns.

project charter A document that formally authorizes the work to begin on a project and provides an overview of objectives and resource requirements.

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Glossary qualitative model A model that involves making

selection decisions based on subjective evaluation using nonnumeric values of project characteristics.

quantitative model A model that involves making selection decisions based on objective evaluation involving numeric values of project characteristics.

stakeholder analysis A process used to identify the influence and interests of the various stakeholders and to document their needs,wants, and expectations

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Glossary strategic plan A formal document that outlines an

organization's three- to five-year mission,vision, goals, objectives, and strategies.

subject matter expert (SME) A person who has the level of knowledge and/or experience in a particular facet of the business needed to support decision making.

SWOT analysis An analysis of strengths, weaknesses, opportunities, and threats; an information gathering and analysis technique to evaluate external influences against internal capabilities.

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Glossary

time value of money The concept that a sum of money is more valuable the sooner it is received: A dollar today is worth more than the promise of a dollar tomorrow. The worth is dependent on two variables: the time interval and rate of discount.

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Review Questions 1. Explain the advantages and disadvantages

associated with each of the following project selection methods: mandates, sacred cow decisions, NPY, IRR, payback period, and ROI.

2. Explain the importance of an organization's strategic plan to the selection process.

3. Why is it important for an organization to conduct a project selection process?

4. Define and describe the key components of a business case

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Review Questions

5. Explain why the contents of a business case might change, depending on the project.

6. Describe the stakeholders who should participate on the project selection team.

7. Explain the differences between qualitative and quantitative models and where each may be appropriate for project selection decisions.

8. Using your own words and example, explain the concept of the time value of money

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Review Questions

9. Explain the process of creating a WSM. Include an explanation of the selection of weights for each criterion.

10. How does the real options approach apply to the selection of IT projects?

11. List and explain the four perspectives the balanced scorecard uses to analyze an organization's performance. How does this relate to project selection?

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Review Questions 12. What is a project charter and what are its principal uses? 13. List and explain the major components of a project

charter. 14. What type of information is collected through a

stakeholder analysis? Explain the process. 15. Describe the contents of a stakeholder assessment matrix. 16. Who should be the individual responsible for planning and

organizing (scheduling, sending out the invitations, and so on) the kickoff meeting. Justify your answer

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Review Questions 17. "The preliminary scope statement describes each

of the major milestones of a project in detail." Do you agree with this statement? Why or why not?

l8. Who should be invited to attend the kickoff meeting?

19. Describe the 10-step project selection process. 20. In your opinion, what are some of the major

drawbacks to qualitative models? 21. What does the acronym SWOT stand for? Explain

Its use

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Projects and Research

1. Write a research paper reviewing the project selection methods that today's organizations from various industries are using. Also look into the WSM criteria and the relative weights different organizations are using.

2. Compare the results from question 1 to those you get from your university's or college's IT department. What differences did you find, and why do you think a university's criteria might differ from the criteria used by a corporate organization?

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3. Search the web or use other means to find examples of project charters. Then do a comparative analysis across industry segments and project types. What items have these charters included that this chapter doesn't describe?

4. Build a list of characteristics that can be used for a WSM. Discuss how different organizations might set the weights based on good and bad economic conditions and highly competitive situations

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5. Can a nonprofit organization receive any value from quantitative selection methods? Explain.

6. Statistics have shown that many organizations today still don't fully utilize a project selection process. Explain why you think this is the case.

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7. Describe a well-planned and well-executed project you were a part of either in school or outside school. Describe a project that wasn't as well planned. Explain what was different about the two and what led to success or failure.

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8. Define a preliminary scope statement for a project to build a simple interactive web site for this class. The web site should be accessible only by current students and instructors. The web site should allow students access to all the material presented in the class, including lecture slides and notes, extra reading, the course schedule, a chat room, a frequently asked questions section,grades, informative links, and the syllabus

NPV,IRR,ROI

Documents

weighted scoring model

high priority rankings

evaluate external influences

project sponsors prepare

stakeholder assessment matrix

complex quantitative models

sacred cow decisions

stock investment options