# Project Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis

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1 Project Evolution & Estimation :cash flow forecasting, cost benefit evolution techniques, risk evolution, Cost benefit analysis

2 EA Cost-benefit Analysis A standard way to assess the economic benefits Two steps Identify and estimate all the costs and benefits of carrying out the project Express the costs and benefits in a common unit for easy comparison (e.g. \$) 2

3 EA Cost-benefit Analysis (cont d) Costs Development costs Setup costs Operational costs 3

4 EA Cost-benefit Analysis (cont d) Benefits Direct benefits Assessable indirect benefits Intangible benefits 4

5 EA Cash Flow Forecasting What? Estimation of the cash flow over time Why? An excess of estimated benefits over the estimated costs is not sufficient Need detailed estimation of benefits and costs versus time 5

6 EA Cash Flow Forecasting (Cont d) Expenditure Income 6

7 EA Cash Flow Forecasting (Cont d) Need to forecast the expenditure and the income Accurate forecast is not easy Need to revise the forecast from time to time 7

8 Cost-benefit Evaluation Techniques Example Year Project 1 Project 2 Project 3 Project ,000-1,000, , , , ,000 30,000 30, , ,000 30,000 30, , ,000 30,000 30, , ,000 20,000 25, , ,000 20,000 50,000 Net Profit 60, ,000 30,000 45,000 Payback ROI 12% 4% 10% 11% 8

9 Cost-benefit Evaluation Techniques Net profit = Total income Total costs Payback period = Time taken to break even Return on Investment (ROI) average annual profit total investment 100% 9

10 Cost-benefit Evaluation Techniques NPV Net present value (NPV) It is the sum of the present values of all future amounts. Present value is the value which a future amount is worth at present It takes into account the profitability of a project and the timing of the cash flows 10

11 Cost-benefit Evaluation Techniques NPV (cont d) Discount rate is the annual rate by which we discount future earning e.g. If discount rate is 10% and the return of an investment in a year is \$110, the present value of the investment is \$

12 Cost-benefit Evaluation Techniques NPV (cont d) Let n be the number of year and r be the discount rate, the present value (PV) is given by PV valuein year n (1 r) n 12

13 Cost-benefit Evaluation Techniques Issues in NPV NPV (cont d) Choosing an appropriate discount rate is difficult Ensuring that the rankings of projects are not sensitive to small changes in discount rate 13

14 Cost-benefit Evaluation Techniques Guidelines: NPV (cont d) Use the standard rate prescribed by the organization Use interest rate + premium rate Use a target rate of return Rank the projects using various discount rates 14

15 Cost-benefit Evaluation Techniques Disadvantage NPV (cont d) May not be directly comparable with earnings from other investments or the costs of borrowing capital 15

16 Cost-benefit Evaluation Techniques IRR Internal Rate of Return (IRR) The percentage discount rate that would produce a NPV of zero A relative measure 16

17 Cost-benefit Evaluation Techniques IRR (cont d) Net Present Value(\$) Discount rate (%)

18 Cost-benefit Evaluation Techniques Advantages Convenient IRR (cont d) Directly comparable with rate of return on other projects and with interest rates Useful Dismiss a project due to its small IRR value Indicate further precise evaluation of a project Supported by MS Excel and Lotus

19 Estimation Why? to define the project budget and to refine the product to realize the budget Who? the manager What? size and cost When? always How? techniques and models 19

20 Issues related to Estimation Difficult to make accurate estimation Better to have previous data and analyze the actual values against their estimates so that you know how accurate you are Even better to have previous data of the whole organization so that you know how accurate the estimation method, if any, used within the organization is 20

21 Positive Attitude Towards Estimation Use your estimation as a guide to manage your project From time to time, you need to revise your estimation based on the current status of the project 21

22 Estimation Approaches Expert judgement Ask the knowledgeable experts Estimation by analogy Use the data of a similar and completed project Pricing to win Use the price that is low enough to win the contract 22

23 Estimation Approaches (cont d) Top-down An overall estimate is determined and then broken down into each component task Bottom-up The estimates of each component task are aggregated to form the overall estimate Algorithmic model Estimation is based on the characteristics of the product and the development environment. 23

24 Size Estimation Problems related to size estimation Size Estimation Model Function Point Analysis (FPA) 24

25 Problems related to size estimation Nature of software Novel application of software Fast changing technology Lack of homogeneity of project experience Subjective nature of estimation Political implications within the organization 25

26 Application & Scope of research Application : Project estimation Sizing Estimation Techniques for Business Critical Software Project Management Evolutionary fuzzy hybrid network CEOS Scope of research : Dynamic bridge substructure evolution

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