Slide 1
Presented to:SIR WALI-ULLAHPROJECT ANALYSISIn
contemporarybusinessandscienceaprojectis defined as a collaborative
enterprise, involving research or design, that is
carefullyplannedto achieve a particular aimPROJECT
Inproject managementa project consists of a temporary endeavor
undertaken to create a uniqueproduct,serviceor result.Another
definition is a management environment that is created for the
purpose of delivering one or more business products according to a
specifiedbusiness case.PROJECT MANAGEMENT
Theexaminationof all thecostsor problems of aprojectbefore work
on it is started.
Risk is a major part of it.PROJECT ANALYSIS
There are two fundamental reasons to perform a project risk
analysis before making a final accept/reject decision:
Project cash flows are risky and may not be equal to the
estimates used to compute NPV.
Forecasts are made by humans who can be either too optimistic or
too pessimistic when making their cash flow forecasts. Risk
analysis will help guard against such biases.
The Importance of Risk AnalysisExpected ValuesThe expected value
of a future cash flow is given by the probability weighted average
of all the possible cash flows that might occur.
The cash flows used to calculate a projects NPV are expected
values.
Key Concepts - Expected Values and Value Drivers
Example 13.1
What is the expected cash value if there are two possible cash
flows, $100 and $400 and the probabilities of these cash flows are
25% and 75%.
Expected cash value = .25 ( 100) + .75 (400) = $325
Key Concepts - Expected Values and Value DriversValue drivers
are the basic determinants of an investments cash flows and
consequently its performance.
Value drivers may consist of determinants of project revenues
(e.g., market share, market size, and price) and costs (e.g.,
variable and cash fixed costsVALUE DRIVERSTechniques..
Break-even analysis determines the minimum level of output or
sales that the firm must achieve in order to avoid losing money
i.e. to break even. In most cases, break-even sales is defined as
the level of sales for which net operating income equals zero.
1.BREAK-EVEN ANALYSIS
The accounting break-even point is the level of sales that is
necessary to cover both variable and total fixed costs, such that
the net operating income is equal to zero.
Payback periodincapital budgetingrefers to the period of time
required to recoup the funds expended in an investment, or to reach
thebreak-even point.2. PAY BACK
WE CAN ALSO FIND IT BY THE NORMAL CLASSICAL WAY OF PAY BACK
PERIOD.2.Cost to purchase Company ABC today: $1,000,000Present
value (PV) of cash flows from acquiring Company ABC:Year 1:
$200,000Year 2: $150,000Year 3: $100,000Year 4: $75,000
Example .The principal amount which is to be deposited is called
as the present value of what one would receive after a specific
period at a certain rate of interest compounded periodically.
P = F/(1+i)nPRESENT VALUE:What one will get out of the principal
amount in some coming future date on a certain interest compounded
periodically.
F = P(1+i)n FUTURE VALUE:An annuity is a series of
payments(usually equal in amount) which are made at regular
intervals of time such as, annually, semi annually etc
Beginning payment: due annuityEnd payment: ordinary annuity
S = R (1+i)n - 1 / iANNUITY:Infinance, thenet present value(NPV)
ornet present worth(NPW) is defined as the sum of thepresent
values(PVs) of incoming and outgoing cash flows over aperiod of
time. Incoming and outgoing cash flows can also be described as
benefit and cost cash flows, respectively.3. NET PRESENT
VALUE(NPV)NPV = (Cashinflows frominvestment) (cash outflows or
costs of investment)Formula .Cost to purchase Company ABC today:
$1,000,000Present value (PV) of cash flows from acquiring Company
ABC:Year 1: $200,000Year 2: $150,000Year 3: $100,000Year 4:
$75,000
Example .Theinternal rate of returnis the rate at which an
investment project promises to generate a return during its useful
life. Theminimum required rate of returnis set by management. Most
of the time, it is the cost of capital of the company.4. INTERNAL
RATE OF RETURN
FORMULA Traditional way For the project feasibility.Any
questions.
