Project Evaluation and Program

Management 1
Yogesh Sharma, Ph.D., P.Eng.

Week 4, Lecture 1 Software Engineering

September 19, 2023 Management (ENSE 374)
Agenda
• Recap
• Business Case and its Components
• Project Portfolio and its Management
• Project Evaluation Factors
• Cost Benefits Analysis and corresponding Techniques
• Summary
Learning Outcomes
After the lecture, students should be able to answer the following
questions
• How to write a business case?
• What is project portfolio? How to manage it efficiently?
• How to perform a cost benefit analysis of a project while
building a project portfolio?
Recap: Agile Development Models
• Was proposed in the mid-1990s to overcome the shortcoming of
waterfall model.
Major aim of agile moles is to facilitate quick project completion.

The distinguishing characteristics of the agile models is the frequent delivery of the
software increments to the customer.

Agile model is an umbrella term used to refer to a set of development processes. These
processes share certain common characteristics but do have certain subtle difference among
themselves.
Best suited
for small
projects
Recap: Agile Software Requirements Management
High
{ Each iteration implement the highest-
Priority priority requirements

Each new requirement is

prioritized and added to
the stack

Requirements may be
reprioritized at any time

Requirements may be
removed at any time

Low
Priority
Requirements Copyright 2004 Scott W. Ambler
Recap: Rapid Application Development (RAD) Model
• This model is the amalgamation of both prototyping and evolution models.
• In this model
• First prototype is constructed using initial requirements and delivered to the customer.
• Then, the new features are added into the prototype, incrementally to accommodate new customer
requirements.
• Unlike prototype model, the prototype is not thrown away.
• Working of RAD
• Development takes place in a series of short cycles or iterations running for limited time called timebox.
• During each timebox, a quick enhancement to a functionality of the prototype is performed.
• Customer evaluates the prototype and gives feedback on the enhancement.
• Development team always have a customer representative working with them.
• This model presses more on short-term planning and heavy reuse of existing code to
expedite the product development.
Recap: Scrum Model
• Requirements are captured as items in a list of product backlog.

Daily
Scrum

Sprint Sprint
planning review
Scrum
Sprint
Product backlog backlog

• Software is incrementally designed, coded and tested during the sprints.

• No changes are entertained during a sprint.
Business Case (week 1, lecture 1)

Definition: It is a project management document that explains how the benefits of

a project overweigh its costs and why it should be executed.
• Business cases are prepared during the project initiation phase (Feasibility
study).
• In general, Feasibility studies or Project justification can also act as a ‘business
case’
• It should show that the benefits of the project will exceed
• Development costs
• Implementation costs
• Operational/Production costs

• Needs to take account of business risks

 Business Case Components

be outlineContains
Describes a problemAtobrief estimate about
of the project the
Describes how the • These should be expressed
• How theinproject is• going to bethe
Describes • Combines • Highlight
expected costs
costs andDescribes
benefit
the speculations and plans
demand of the product or
structure of an organization the management
solved or an opportunity
scopeto(goals, deliverables, implemented?
financial terms where possible. associated withdata
theto establish
associated
value ofrisks. time and teams.
for resources,
be exploited. deadlines) service and likely will be affected by the
• In the end it is up•to This should considerimplementation
the client the plan. • Distinguishes between project
project.
competitors. implementation of the to assess these – as they
disruption
are to an organization
• These are tentative
• Variouscosts
cost-benefit
which
and business
evaluation
objectives and
project. For example, going to pay for the project.
that a project mightare
cause.
expected totechniques
be changed.
are
risks.
employed.
information system.
Business Case Format (for project)
BUSINESS CASE

Proposed Project [At this point, the project is not yet approved, so it may not have its final name or the name
may change. The current name or identifier should be included here.]

Date Produced [The date the Business Case is produced.]

Background [This section should include information that will help the reader understand the context and
background history regarding the potential project. This section should not be written
assuming that the background is common knowledge, but instead should be specific in order
to create a common understanding of the context.]

Business Need/ [This section should demonstrate the business need or opportunity that the proposed project
Opportunity will address.]

Options [This section documents the potential approaches to complete the project. There are always a
minimum of two options: perform the project or do nothing.]

Cost-Benefit Analysis

[This section contains the detailed costs and benefits of each option listed in the previous section. The costs may include
considerations such as financial expenditures, the amount of time required, possible risks, and the potential for reduced
quality. The benefits may include the potential of increased sales, market share, and brand recognition, and the reduction
of errors and ongoing costs. Each option should be clearly identified and listed separately.]

Recommendation

[This section contains the recommended option from the previous section.]
Business Case Components and Format
Mapping Proposed Project
BUSINESS CASE

[At this point, the project is not yet approved, so it may not have its
final name or the name may change. The current name or identifier
should be included here.]

Date Produced [The date the Business Case is produced.]

Background [This section should include information that will help the reader
understand the context and background history regarding the
potential project. This section should not be written assuming that
the background is common knowledge, but instead should be
specific in order to create a common understanding of the context.]

Business Need/ [This section should demonstrate the business need or opportunity
Opportunity that the proposed project will address.]
Options [This section documents the potential approaches to complete the
project. There are always a minimum of two options: perform the
project or do nothing.]

Cost-Benefit Analysis
[This section contains the detailed costs and benefits of each option listed in the
previous section. The costs may include considerations such as financial expenditures,
the amount of time required, possible risks, and the potential for reduced quality. The
benefits may include the potential of increased sales, market share, and brand
recognition, and the reduction of errors and ongoing costs. Each option should be
clearly identified and listed separately.]

Recommendation
[This section contains the recommended option from the previous section.]
Project Portfolio and its Management
Project Portfolio Definition: It is a grouping of projects that are managed
together and optimized for financial and strategic goals of an organization.

Project Portfolio Management (PPM): It refers to prioritizing the allocation of

resources to the existing projects. It decides which new projects should be
accepted and which existing ones should be dropped.

Project Management vs PPM

Project Management is about the execution and delivery – doing project right

PPM is about doing the right projects at the right time by selecting and managing the
projects.
Portfolio Management Concerns
Concerns of portfolio Management includes
• Evaluating which project proposals are worth implementing
• Assessing the risk involved with projects
• Deciding how to share resources between projects
• Taking account of dependencies between projects specially when several
projects need to be completed to reap benefits.
• Ensuring that projects do not duplicate work. If duplication found, remove it.
Elements of Project Portfolio Management

• Create a central record/repository of all • Actual costing and performance of projects

• Gathered information during portfolio
projects within an organization. can be recorded and assessed.
definition and management can be used
• Must decide whether to have ALL projects • Progress of the project based on the
achieve better balance between projects.
in the repository or, say, only ICT projects. recorded performance indicators can be
• Balance need to be created between high
• Note difference between new product tracked.
risky-high profitable and low risk-modest
development (NPD) projects and renewal • This information can be the basis for the
profitable projects.
projects e.g. for process improvement acceptability or rejection of new projects.
Evaluation of Individual Projects

• How to calculate and compare the following

• What are various sources of cash inflow and
for each project
• Do we have the required technical outflow?
• Development costs
• When certain expenditure and income will
skills and infrastructure? • Setup costs
take place?
• What will be the cost of required • Operational costs
• Can we fund the development expenditure
technology (software/hardware)? • How to compare and prioritize the projects
(salaries) from company’s resources or by
based on net profit, return on investment,
borrowing?
payback period and other metrics?
Cost-benefit Analysis (CBA)
• It is related to individual project and comprises of two steps
Step 1: Identifying all of the costs and benefits of carrying out the project and operating
the delivered application.
Step 2: Expressing these costs and benefits in common units.

What kind of costs?

Costs of putting the software into place. Mainly Costs of operating the software after
Development staff costs. Mainly includes, staff
includes new hardware, staff training and installation. Mainly include updates and
recruitments and their salaries.
recruitment maintenance.
Cash Flow Forecasting
• The timing of costs and income from a product or system needs to be estimated.

The development of the software will incur costs.

When the software system is released it will generate income that gradually pays
off costs.
Some costs may relate to decommissioning and replacing the software with other.
Cost-benefit Evaluation Techniques
Example: Four Projects Cash Flow Projections
Year Project 1 Project 2 Project 3 Project 4
0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200,000 30,000 30,000
2 10,000 200,000 30,000 30,000
3 10,000 200,000 30,000 30,000
4 20,000 200,000 30,000 30,000
5 100,000 300,000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000
Cost-benefit Evaluation Techniques

Net Profit = Total Income – Total Costs

Net Profit: Example
Year Project 1 Project 2 Project 3 Project 4
0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200,000 30,000 30,000
2 10,000 200,000 30,000 30,000
3 10,000 200,000 30,000 30,000
4 20,000 200,000 30,000 30,000
5 100,000 300,000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000

Total Income = 150,000 Total Costs = -100,000

Net Profit = 150,000 – 100,000 = 50, 000

 Hence, building a project portfolio based
Net Profit: Shortcomings on only net profit can be error prone.
Year Project 1 Project 2 Project 3 Project 4
0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200,000 30,000 30,000
2 10,000 200,000 30,000 30,000
3 10,000 200,000 30,000 30,000
4 20,000 200,000 30,000 30,000
5 100,000 300,000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000

Project 2 has maximum net profit of 100,000 but has maximum total costs. More investment, means
more risk. One should choose Project 1, 3 and 4 over project 2 but net profit won’t let us.

Does not account timing of cash flows. Project 1 and 3 have equal net profit, hence equally preferable.
However, Project 3 has a steady income generation means less wait for full returns.
Cost-benefit Evaluation Techniques

It is the Length of time a project takes to recover the cost of investment. Time it will
take to reach break-even point.

Projects with the shortest payback period will be chosen over others.
Payback Period: Example (subtraction
method)
Year Project 1 Accumulated
0 -100,000 -100,000
1 10,000 -90,000
Pay-back period = 5 years
2 10,000 -80,000
3 10,000 -70,000
4 20,000 -50,000
5 100,000 50,000
Net Profit 50,000 50,000
 Hence, building a project portfolio based on
Payback Period: Shortcomings only payback period can be error prone.

Year Project 1 Project 2 Project 3 Project 4

0 -100,000 -1,000,000 -100,000 -120,000
1 10,000 200,000 30,000 30,000
2 10,000 200,000 30,000 30,000
3 10,000 200,000 30,000 30,000
4 20,000 200,000 30,000 30,000
5 100,000 300,000 30,000 75,000
Net Profit 50,000 100,000 50,000 75,000

It ignores the overall profitability of the project. It does not consider values occur after the
break even.
Project 3 has earlier break even and will be chosen. However, Project 4 and 2 are more
profitable. But payback period metrics will not let us to choose project 4 and 2.
Cost-benefit Evaluation Techniques

aka, Account rate of return (ARR)

A measure to evaluate the profitability of an investment

𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
𝑅𝑂𝐼 = × 100
𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
Return on Investment: Example
Year Project 1
0 -100,000 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑎𝑛𝑛𝑢𝑎𝑙 𝑝𝑟𝑜𝑓𝑖𝑡
𝑅𝑂𝐼= × 100
1 10,000 𝑡𝑜𝑡𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
2 10,000
3 10,000 50,000
4 20,000 5
𝑅𝑂𝐼 = × 100=10 %
5 100,000 100,000
Net Profit 50,000
Return on Investment: Shortcomings

Alike net profit, it does not take time into account. This decouples it from the interest rates
charged by the investors.

It can be very misleading.

Hence, building a project portfolio based on only

return on investment can be error prone.
 Cost-benefit Evaluation Techniques

Net present value considers both the profitability of a project and the timing of the cash flows.

+ - initial investment
Net Present Value: Example
Year Project 1 If(r = 5%) 10,000
1
= 9523.809
(1+.05)
0 -100,000
10,000
1 10,000 9523.809 2
= 9070.295
(1+.05)
2 10,000 9070.295 10,000
= 8638.376
3 10,000 8638.376 (1+.05)
3

4 20,000 16454.049 20,000

=16454.049
4
(1+.05)
5 100,000 78352.617
100,000
NPV 5
=78352.617
(1+.05)

+ + + +
Net Present Value: Comparison
Year Project 1 If(r = 5%) Project 3 If(r = 5%)
0 -100,000 -100,000 Project 3 has higher NPV than Project 1
1 10,000 9523.809 30,000 28571.428 but same net profit and return on
investment (RoI).
2 10,000 9070.295 30,000 27210.884
3 10,000 8638.376 30,000 25915.128 This shows that investor have to wait
4 20,000 16454.049 30,000 24681.074 longer for the bulk income in the case of
Project 1.
5 100,000 78352.617 30,000 23505.784
NPV 29884.299 This makes Project 1 less preferable than
Net Profit 50,000 50,000
Project 3.

RoI 10% 10%

Net Present Value : Shortcomings

A positive NPV does not describe the initial investment cost and may not be enough to
determine if an investment is worthwhile.

The main difficulty with NPV is selecting the appropriate discount rate (r). It should be chosen
to reflect the interest rates plus premiums.

Hence, building a project portfolio based on only

Net Present Value can be error prone.
 Cost-benefit Evaluation Techniques

Estimates the annualized rate of return that a project is going to yield.

𝐹𝑜𝑐𝑢𝑠 𝑖𝑠 𝑡𝑜 𝑐𝑎𝑙𝑐𝑢𝑎𝑙𝑡𝑒 𝑡h𝑒 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑟

 NVP vs IRR
We may have a situation where two projects have conflicting NVP and IRR values.

Project Year 0 Year 1 IRR NVP @ 7%

Project A -100,000 150,000 50% 37,557.87
Project B -300,000 420,000 40% 86,470.53

Project A has higher IRR. We should pick

project A. Conflic
Project B has higher NVP. We should pick t
project B. What one should do?

Trust NVP because it gives you the estimate of total wealth the project will add to the company.
Summary
• Business cases are prepared during the project initiation phase explaining how the
benefits of a project overweigh its costs and why it should be executed.
• Project portfolio management is about doing the right projects at the right time by
selecting and managing the projects.
• While creating software engineering project portfolio, project managers and other
organization governing authorities access the project from technical and financial
aspects.
• Following are the useful techniques for financial assessment of a software project
• Net profit
• Payback period
• Return on investment
• Net present value
• Internal rate of return