The Initial Investment - Assignment Example

?FINAL EXAM BUS/IST 503 (last, first __________________________________________ Question Feasibility Analysis – project initiation & planning Net Present Value (NPV) For the next five years from 2013 to 2017, the $250,000 reduced cost in labor and $150,000 increase in gross revenue are supposed to count as income. To this end, the sum of the various payments made from 2013 to 2017 is deducted from $350,000 to give the value for each year. This results in the table below Year 0 1 2 3 4 5 Value 350,000 – 128,3000 = (221,700) 350,000 – 119,300 = (230700) 350,000 – 110,300 = (239700) 350,000 – 102, 300 = (247700) 350,000 – 105,300 = (244700) Subtracting the initial investment amount from the amount found on the spreadsheet, the NPV comes up as $1,022,968.69 - 450,050 = 572968.69 Rate of Return on Investment (ROI) Using the NPV to represent the summation of gains to be accrued for all investment years, ROI = (Gains - Investment costs) / (Investment costs) = (572968 – 450,050) / 450,050 = 0.27% Break Even Point Indeed, in talking about break even point, reference is being made to that time in the investment process when a balance can be reached in either making a profit or a los (Chen, and Chung, 2009). Subsequently, gain must equal loss at this point so that the marginal level of profit can be 0 on a normative scale. Noting that in our present scenario the capital injection will not be added into finding the break even point, it is important to mention however that the opportunity cost of the capital shall be accounted for. This way, the break even point can be said to be that time in the investment when gains from reduced cost of labor and increases in gross revenue per year is equated to the sum of all the expenditure cost. Should the project be accepted for financing? Generally, a project is worth accepting for financing if the cost of the capital injection is relatively less than the internal rate of return. In other words, the internal rate of return ought to be greater than the capital for the investment to be accepted as viable. To this end, as the quoted net present value on the investment has been found to be 572968 whiles the initial capital is 450,050, it can be said that the project should be accepted for financing. Question 2: Earned Value Management – Project monitoring and controlling 1. Based on the 0-100% rule, please calculate the following: a. CPI and SPI and explain what the values mean. [4 pts] The CPI strikes a ratio between the expected value and the actual value. In this present situation, the expected values are represented by the planned cost. Subsequently, CPI = ?Planned Cost/?Actual Cost = 3600/3400 = 1.06 Value for SPI is calculated based on the period for which activities that been completed according to the 100%. In this direction, SPI = Expected Value / Present Value = 600+1200+400+400)/(600+1200+400+400) = 2600/2600 = 1 b. Estimated cost at completion for the deck project [3 pts] Estimated cost at the time of completing the deck project will be backdated to the cost involved in all activities that were carried out ahead of that time. This gives a total planned cost of $6400 and actual cost of $3600. Given the formula for calculating estimated cost as ECT = EAC – AC = (6400/1.06) – 3600 = $2, 437.74 c. Estimated time to complete the project. [2 pts] The scheduled times are not expected to change. To this end, the estimated time to complete the projects remains 12 days. 2. Based on the proportionality rule (assume that for activity 5, 3 out of 4 holes had been completed, thus activity 5 has been completed in proportion of about 75%) recalculate: a. CPI and SPI and explain what the values mean. For the CPI, in relation to the proportionality rule, if 75% of work is completed as at the time of calculating the general CPI, the recalculated CPI becomes 1.06 x 0.75 = 0.795 For SPI, the same argument remains the same as above. The formula does remains as 1 x 0.75 = 0.75 b. Estimated cost at completion for the deck project [ Proportionally, the estimated cost would have to be multiplied by the percentage of work completed. = $2,437.74 x 0.75 = 1828.31 c. Estimated time to complete the project. Estimated time would not change at the end of the project because greater proportion of work had been completed by day 5 and the estimated times for the other days are expected to remain the same. Estimated time = 12days 3. Which of the 2 rules above (0-100% or proportionality rule) would you use a project manager and why? Proportionality rule would be used because it gives a more precise description to the extent of work done with each activity than the 0-100% rule. For example even though calculations for the proportionality rule would recognize that 75% of work has been completed as of day 5, 0-100% rule would count work done on that day as 0% (Holland, n.d) and this is rather not realistic. 4. Recommendation to client Results from the calculation of the estimated cost and time using the proportionality rule shows that there is so much authenticity and clarity with the identification of specific values. To this end, I would advise the client that in undertaking the deck project he should use the proportionality rule in finding out the cost and time expected to be involved as this would enhance the calculation of efficiency and effectiveness more clearly (Chen, and Chung, 2009). Question 3: Risk analysis using decision trees 1. Build a decision tree and show all probabilities and outcomes 0.2 winning Propose project 1 0.8 losing Submit proposal Propose project 2 0.2 winning $60,000 0.1 Back out from bid Losing -$50,000 Be saved from losses $90,000 Loss all possible profits -$360,000 2. Multiplying the probabilities by the monetary values, it would be realized that project 2 comes up with a higher estimated monetary value. To this end, it is suggested that the president bid on project 2 instead of project 1. This recommendation is made, not withstanding the fact that project 1 promises some higher overall gains. What makes project 1 unsuitable is that is has a higher probability of not winning the bid. Calculations for these are shown as below EMV2 = (0.1*-20,000) + (0.2*-50,000) + (0.7*60,000) = 42,000 – 1,000 – 2,000 =$39,000 EMV1= (0.8*- 40, 000) + (0.2*300,000) = $28, 000 3. Project 1 requires less capital injection and should thus be the preferred choice in case there are limited resources. Question 4: Project lifecycle management Phase/Process Group Purpose Specific Output Documentation Brief Description of Output Document Initiating Developing a business case with which a feasibility study is undertaken to establish a project charter and institute a project team and office (Holland, n.d) Proposal It states in clear therms, the aims and objectives for undertaking the project; as well as the mission and vision statements of the project management Planning Creations of a number of plans including resource plan, quality plan, project plan, communication plan and procurement plan. Blue print It spells out the precise processes and plans to be followed in completing the project. Monitoring & Controlling Appraising the project to ascertain how it fits out to plans, and ensuring that avenues are created to make adjustments. Evaluation checklist This document spells out all the activities and their specifications. The document is used by indicating the rate of adherence to the Closing Performing an official project closure and reviewing the project. Report presentation Project summary and future expectations or changes Question 5: Risk Response Planning RISK RESPONSE PLAN Risk ID Risk (Event) Description Risk Consequence Impact Probability of Occurrence Risk Response Strategy Specific Actions Describing the Proposed Strategy 1 Employee Resistance Lack of compromise: once there is resistance among the employees, they will resist all attempts to implement the project plan. The subsequent effect is that there will be stagnation of growth. 3 80% Risk Avoidance: This is preferred the impact is high, as well as the probability and so the strategy must be used to ensure that the risk ceases its possibility all together (Thompson, 2007). 2 Loss of key project team member Delays on delivery of projects: once key project team members leave, it would cause so much delay because there will be the need to recruit new members and this may cause the suspension of progress for some time. 2 50% Transfer: This is going to be a strategy that would ensure that someone else outside the project task responsibility for the risk (Urwick, 2003). This is very suitable because a recruitment agency can be fallen upon to take responsibility of loss of key project team members. 3 Loss of project manager Delay on delivery of project: Once the project manager is lost, there will be delays in the sense that there would have to be a waiting period to get a new project manager to lead the project team. 2 25% Mitigation: This is suggested as the present risk is considered as highly unacceptable. Mitigating risk would reduce the current probability to a considerable margin so that their severity will fall lower than the maximum risk tolerance level (Thompson, 2007). 4 Security breach resulting in unintended and unauthorized release of confidential data Invasion by intruders: intruders are going to have access to the business and project strategy of the company and have a way of directly counter-attacking it. This may affect the market dominance of the company negatively. 3 60% Risk Avoidance: This is preferred the impact is high, as well as the probability and so the strategy must be used to ensure that the risk ceases its possibility all together (Urwick, 2003). 5 Implementation of new requirements Delay to project execution: Once the original requirements are tempered with, the most likely consequence is that there will be delays because it will take project officers more time to work out on the new changes. 1 30% Acceptance: It can be seen that the impact and probability are all favorable. To this end, the problem will be fixed once it comes up and work will move on. 1. Question 6: Project Classic Mistakes 1. Going through the Denver Airport case, the evident mistake could be said to be that of research oriented development, which is under the category of product. This is because right from the onset of the project, the trade-offs including cost, time, and project dimension seemed not to have been taken into consideration. These components however form a larger contributor to the project schedule (Vancouver, 2006) so it was not surprising that the opening of the baggage system delayed. 2. With the case of the ERP implementation at Bombardier Aerospace, looking at the fact that there was no continuation of the projection in the middle way because of inappropriate business process, insufficient involvement of staff and outmoded company vision, which are all management related issues, it can be said that there was evidence of insufficient management control. This is a mistake that comes under the process category. the systems and data which were finally in place were not communicating with one another, the clear indication that is got is that there were process lapses, which were not making it possible for the various components of the systems to coordinate (Vancouver, 2006). In this vein and in relation to Nelson (2007), it can be said that the classic mistake that was evident had to do with process. This is because it is process that caters for the technical methodologies, which are expected to ensure the coordinated functioning of all components of the system. 3. Avoiding weak personnel and team is the best practice that could salvage the Denver mistake and crisis because with the right personnel and team, the task of undertaking detailed research and development would not have been compromised to bring about the problem that was experienced. 4. Learning from best practices from Nelson and in relation to the fact that the mistake associated with Bombardier case had to do directly with management issues, it can be said that the mistakes identified could easily be mitigated if there was an effective stakeholder management. This is because with an effective stakeholder management, all members who are concerned with the management process of the project would be challenged to take up their roles right from the unset of the project to the very end of it. 5. The Denver airport project could have been closed down in an effort of avoiding negative outcomes, by just carrying out a project appraisal on the airport project, which could have obviously shown a low NPV, indicating that the project is not economically viable. REFERENCE LIST Chen, MS and Chung, J., (2009). ‘Note on the Production Function for Organizations doing Case Work’, Mathematical Social Sciences, 19: 135-141 Holland, n.d in Rankin, M., P.Stanton, S.McGowan, K.Ferlauto and M.Tilling, Contemporary issues in accounting, Milton, Qld.: John Wiley, 2012 Thompson, J. (2007). Organisations in action, New York: McGraw-Hill Urwick, L. (2003). The Elements of Administration New York: Harper Vancouver, J., (2006). ‘For Organisations Behaviour: Understanding Humans, Organisations, and Social Processes’, Behavioural Science, Vol. 41: 165-203 Read More