Different Topics about Projects
A. Review Questions
- How do you know if a project is economically feasible? Why is TCO important?
The feasibility of a project is a significant part of the success of a project before the organization decides to commit the required personnel, time, and resources to the development of the project. Some of the ways of knowing whether a project is economically feasible is whether the project aligns to the goals and objectives of the organization and whether it will be able to solve the intended problems. Additionally, after the evaluation the full cost of the project, it should meet the intended the considered personnel time and the cost of the hardware and software. It is of significant importance that the expected gain from the project is worth of its full cost.
Total Cost Ownership (TCO) is an important aspect of a project. It is important because it helps the project team to examine all the costs related to the project regarding acquisition, transportation, and storage of products within the line of the supply chain. It is also a combination of both direct and indirect costs related to the assets and tasks.
- Describe each cost classification and include two examples.
- Behavior: Do the costs increase as the organization becomes busier or do they remain the same. Classification by behavior is important to the process of budgeting
- Location: Determines the place in the organization where the costs are going to be incurred. Examples are storage and delivery costs.
- Function: These are costs that an organization incurs about activities such as research and development, training, marketing, and manufacturing.
- The responsibility of control: Costs in an organization need some form of control, and an organization needs a person responsible for controlling such as the branch managers.
- Type: These include costs such as material, labor, and other forms of production expenses like cost incurred in running machinery.
- Traceability: This relates to whether the costs are direct or indirect. Direct costs can easily be traced in an item produced such as the cost of raw materials whereas indirect costs cannot be easily traced in a product.
- What are four chargeback methods? In your view, is one more than another?
- No charge
- Fixed charge
- Variable charge based on usage of resource
- Variable charge according to the volume
In my view of the above four chargeback methods, there is none which is more than the other because all the four are used in allocating the indirect costs incurred in running of the department of IT.
- Describe each benefit classification, and include two examples.
- Positive benefits: These are the types of benefits which increase organization’s revenues, improve service delivery, or significantly contribute to the organization as a direct outcome of the implementation of the new information system. Examples include high employee morale and improved inventory management.
- Cost avoidance benefits: These are the type of expenses that would be required if an organization fail to install a new system. Examples are avoiding problems which an organization would face with the current system and handle the available work with the current staff instead of having to hire more people.
- What formula do you use to calculate the payback period?
Payback period is the time an organization takes to recover the cost of a system. The payback period can easily be calculated by making a graphical comparison between accumulated costs and benefits and by taking the time at which the two sections under the two graphical curves are equal and not when current benefits are equal to the current costs.
- What formula do you use to calculate ROI?
Return on Investment (ROI) is a ratio of the profit or loss an organization makes in a fiscal year. It is expressed regarding the investment and expressed as a percentage of either increase or decrease in the value of the investment during that particular year. The basic formula for calculating ROI = Net Profit/Total Investment*100
- Would the formulas in questions 5 and 6 also apply to heavy equipment, such as a bulldozer? Why or why not?
Payback period and Return on Investment (ROI) can apply to heavy equipment such as a bulldozer. An organization can calculate the time it will take to recover the costs of the bulldozer by comparing the accumulated costs and the benefits the Bulldozer brings to the organization. On the ROI, the organization can calculate the profits the Bulldozer brings to the organization and the cost of the investments and see what the bulldozer has returned since the organization invested on it.
- Define the term present value, and provide an example.
Present value is a type of a technique used in measuring the present value of a future dollar than when an organization invests it today at a specified rate, it will grow and bring exactly one dollar at a specific time in the future. For example, assuming that a parent would like to put money in an account now to ensure their child has sufficient money in 10 years for buying a car. If the parent would like to give the child US$10,000 in 10 years and they know the bank can give them 5% annually from the savings during that time, how much should the parent put in the account? According to the present value formula:
PV=10000/ (1+0.05)10 = 6139.13
Therefore, $6,139.13 will be worth $10,000 over a period of 10 years if the rate at which it is earning interest is 5% annually. It means that the present value of $10,000, in this case, is $6,139.13
- What is the meaning of the phrase, time value of money?
Time value of money is a technique or a concept that organizations or individuals use to calculate the amount of money they need to invest today at a specific rate of interest to be able to gain a certain amount of money at a specific time in the future.
- Why is it difficult to assign a dollar figure to an intangible cost? Can it ever be done? Explain your answer, and provide an example.
Intangible costs are the types of costs whose dollar value cannot be easily calculated. Examples of intangible costs are customer dissatisfaction, low employee morale, and reduced availability of information among many others. On careful examinations of the intangible item by the analyst, it might be possible to estimate their dollar value. Such examples are where the users might not like the installed system because of its difficulties to use. Although this is an intangible cost in translates to increasing in errors that need to be corrected which can probably be assigned tangible dollar cost. The analyst should try to work with tangible costs if possible.
- Discussion Topics
- Suppose your supervisor asks you to inflate the benefit figures for an IT proposal to raise the priority of his or her favorite project. Would this be ethical? Does internal cost-benefit analysis affect company shareholders? Why or why not?
It would not be ethical for a supervisor to ask me to inflate the benefit figures for an IT project proposal thus raising the priority of their favorite project. It will not be ethical because it will have conflicted between the needs of the part which is the supervisor and the needs of the whole which are the organization. The internal cost-benefit analysis does not affect the shareholders. The reason why internal cost-benefit analysis does not affect the shareholder is that it analyzes the value chain of the internal processes of the organization that creates profits against the costs of manufacturing or producing goods and services and not the inputs of the shareholders. The internal cost-benefit analysis establishes the links between the costs and processes in which the shareholders do not fall. It also works out the methods that an organization can use to reach the relative cost advantages.
- In this Toolkit Part, you learned how to use payback analysis, ROI, and NPV to assess IT projects. Could these tools also be used in your personal life? Give an example of how you might use each one to help you make a financial decision.
It is possible that payback analysis, Net Present Value (NPV), and Return on Investment (ROI) to be used in my personal life in assessing IT projects. The payback period can be used to tell how long I am going to take to earn the money I will spend on an IT project. I will take the cost of the project and divide it among annual cash flow thus getting payback period. I will use the NPV to evaluate the IT project thus allowing me to consider the time value of money invested in the project. Essentially, the NPV will help me in finding the present value in the current dollar of the future net cash flow of the IT project. ROI will help me in determining the profit or loss I am going to make in a fiscal year from the investment in the IT project thus determining the profitability of the project.
- Is there a role for intuition in the decision-making process, or should all judgments be made strictly on the numbers? Explain your answer.
There is a role for intuition in the process of decision-making. Therefore, all the judgments should not be made strictly on the numbers. Intuition is required because of how life has become dynamic. The solution to a decision comes from the subconscious mind instead of engaging in a lengthy chain of logical derivations. Intuition makes a person more effective in the process of decision-making especially when dealing with non-standard situations or an expedient decision-making process. Intuition helps a person to process information in parallel as opposed to sequentially. The person considers the situation as a whole instead of going through the logical sequence of thoughts one at a time. It also helps to connect the person to the emotions.
- The time value of money can be an important factor when analyzing a project’s NPV. Is the time value of money just as important in periods of low inflation as it is in periods of high inflation? Explain your answer.
Time value of money is just as important in periods of low inflation as the periods of high inflation. It is important because the time value of money will help an investor while making decisions on investments, financing, and dividend given the company’s or individual investment. Time value of money will mean that worth of a dollar received today will be different from the dollar received in the future. The concept will be applicable in the periods of both low and high inflations for an investor
- Suppose you are studying two hardware lease proposals. Option 1 costs $4,000, but requires that the entire amount be paid in advance. Option 2 costs $5,000, but the payments can be made $1,000 now and $1,000 per year for the next four years. If you do an NPV analysis assuming a 14% discount rate, which proposal is less expensive? What happens if you use an 8% rate?
- Option 1 will only require $4000. This option does not require any calculations because it will be paid up front with no application of discount rate in the process.
- Option 2 will be calculated using the following formula (14% discount):
- PV=5000/ (1+0.14)4 + 1000
The cost is approximately $3960
- (8% discount rate)
PV=5000/ (1+0.08)4 + 1000
The cost is approximately $4676
Therefore, it will be better to take option 1 if the rate of discount is 14%. However, it will be advisable to take option 2 if the discount rate is 8%.
- Assume the following facts:
A project will cost $45,000 to develop. When the system becomes operational, the operating costs will be $9,000 during the first year, $9,200 during the second year, $9,500 during the third year, $9,800 during the fourth year, and $10,300 during the fifth year. The system will produce benefits of $30,000 in the first year of operation, and this figure will increase by a compound 10% each year.
What is the payback period for this project?
Total costs = Initial costs + operational costs
Total costs = 45000+9000+9200+9500+9800+10300
Total costs = $92,800
Payback Period = Initial investment/Annual payback
$92,800 – 30000 = 62,800 (Year 1)
62,800 – 33,600 = 29,200 (Year 2)
29,200 –37,632 = -8432 (Year 3)
Therefore, the payback period is 3 years
- Using the same facts as in Project 2, what is the ROI for this project?
ROI of the project
Investment = $92,800
Profits = (30000+33600+37632+42147.84+47205.58) = 190586
ROI = 190586/92800*100
ROI = 205.37
- Using the same facts as in Project 2, what is the NPV for this project?
NPV of the project
Net Cash Inflow/ (1+Discount Rate) Time of cash inflow