Project Management Unit 3

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Questions and Answers

What is the primary goal of many organisations?

To convert strategy into new products and services

To improve their business strategy

To make a profit (correct)

To implement projects and programmes

What is the importance of project managers understanding their organisation's mission and strategy?

To improve their business strategy

To enable them to make informed decisions and adjustments (correct)

To make unreasonable choices in selecting projects

To convert strategy into new products and services

What is the purpose of project selection methods?

To select the most expensive projects

To improve their business strategy

To make reasonable choices in selecting projects and highlight the major pros and cons of the methods (correct)

To implement projects and programmes

Why is it vital for project managers to think and act strategically?

Because organisations now use projects to convert strategy into new products, services, and processes Signup and view all the answers

What do project managers need to exhibit to senior management?

How their projects contribute to the firm's overall strategy Signup and view all the answers

What is covered in this unit?

The different project selection methods consisting of numeric and non-numeric models Signup and view all the answers

What happens when projects and programmes become misaligned to the business strategy?

They are terminated Signup and view all the answers

Why do project managers tend to make serious mistakes when they have no understanding of the role of projects in accomplishing the strategy of their organisation?

They focus on problems or solutions that have low priority strategically Signup and view all the answers

What is the main reason why strategies are not realised in organisations?

Lack of incentives tied to strategy Signup and view all the answers

What happens when employees do not understand the organisational strategy?

They make decisions that may not align with the strategy Signup and view all the answers

What is the main purpose of the Balanced Scorecard strategic management system?

To provide a framework for communication and feedback Signup and view all the answers

Why do companies pour good money after bad when implementing a strategy?

They lack clear data Signup and view all the answers

What is the main reason why multiyear results rarely meet projections?

The way strategies have been defined and managed for years is doomed to failure Signup and view all the answers

What is the main advantage of aligning projects to overall strategy?

It ensures projects achieve strategic objectives Signup and view all the answers

What is the main consequence of not determining a connection to execution when designing and communicating strategy?

Strategy is merely loose words – pretty but without relevance to the worker’s day-to-day job and the company’s operations Signup and view all the answers

What is the main role of a feedback loop in a truly balanced organisation?

To allow strategic concepts to also flow upward Signup and view all the answers

What is a common issue with strategy proposals in many companies?

Unrealistic financial expectations Signup and view all the answers

What is operational effectiveness, according to Porter (1996)?

Performing similar activities better than rivals Signup and view all the answers

What should companies do to prioritize projects effectively?

Develop a set of criteria to evaluate projects Signup and view all the answers

What is the purpose of sensitivity analysis?

To analyze the uncertainty of project outcomes Signup and view all the answers

What type of models use numbers as inputs for decision-making?

Numeric models Signup and view all the answers

Why should companies focus on developing and maintaining core competencies?

For long-term survival Signup and view all the answers

What is the benefit of aligning selected projects to strategy and organisational needs?

Projects are more likely to add value to the organisation Signup and view all the answers

Why is it important to distinguish between operational effectiveness and strategy?

To avoid mutually destructive competition Signup and view all the answers

What should be considered beyond direct financial return when selecting projects?

Other criteria, such as organisational needs Signup and view all the answers

What is the goal of project selection?

To make the most reasonable choices in selecting projects Signup and view all the answers

What is the main purpose of a balanced scorecard approach?

To assist in selecting and managing projects that align with business strategy Signup and view all the answers

What type of estimation technique uses historical project data?

Analogous Estimation Signup and view all the answers

What is the primary purpose of a checklist model?

To develop a list of criteria for project selection Signup and view all the answers

What is the output of a multi-weighted scoring model?

A weighted score for each project Signup and view all the answers

What is the main purpose of numeric models in project selection?

To make project selection decisions using financial analysis Signup and view all the answers

What is the term for a formal document submitted to the change control board?

Change request Signup and view all the answers

What is the main benefit of using a weighted scoring model?

It allows for the evaluation of project proposals using qualitative and/or quantitative criteria Signup and view all the answers

What is the main advantage of using a balanced scorecard approach?

It helps in selecting projects that align with business strategy Signup and view all the answers

What is the term for the process of evaluating project proposals using multiple criteria?

Multi-Weighted Scoring Model Signup and view all the answers

What is the main disadvantage of analogous estimation?

It is considered the most inaccurate estimation technique Signup and view all the answers

What is the ROI of the house flipper's project?

55.56% Signup and view all the answers

What is the key to project selection according to the text?

Being unbiased about the process Signup and view all the answers

What is the primary purpose of a scoring model in project selection?

To weigh project criteria according to their importance and priorities Signup and view all the answers

What is the purpose of considering the organisational strategy in project selection?

To ensure alignment with the organisation's mission and strategy Signup and view all the answers

What is the purpose of calculating the NPV of a project?

To determine the viability of a project Signup and view all the answers

What is the benefit of selecting projects that align with the organisational strategy?

It ensures the project is financially viable Signup and view all the answers

What does the payback model measure?

The time it will take to recover the project's initial investment Signup and view all the answers

Which of the following is an advantage of the payback analysis?

It emphasises cash flows, a key factor in business Signup and view all the answers

What is the payback period for Project A, which has an initial investment of R700,000 and projected cash inflows of R225,000 for 5 years?

3.1 years Signup and view all the answers

What is the main disadvantage of the payback analysis?

It ignores the time value of money Signup and view all the answers

A company is considering two projects, Project A and Project B. Project A has a payback period of 3.1 years, and Project B has a payback period of 3.6 years. Which project should the company choose from a cash flow standpoint?

Project A Signup and view all the answers

What is the formula to calculate the payback period for an uneven cash flow?

A + (B/C) Signup and view all the answers

What is the payback period for the investment with an initial investment of R200,000 and cash inflows of R70,000, R60,000, R55,000, R40,000, R30,000, and R25,000 over 6 years?

3.375 years Signup and view all the answers

Which of the following is a limitation of the payback analysis?

It ignores the time value of money Signup and view all the answers

A company is considering two projects, Project A and Project B. Project A has an initial investment of R150,000 and an annual net cash flow of R40,000. Project B has an initial investment of R200,000 and an annual net cash flow of R50,000. Which project should the company choose from a cash flow standpoint?

Project A Signup and view all the answers

What is the main advantage of using the payback period method for project selection?

It is a simple and easy-to-use method Signup and view all the answers

What is the primary consideration when deciding whether to accept a project based on its Net Present Value (NPV)?

The NPV is greater than or equal to zero Signup and view all the answers

What is the formula for calculating the Discount Factor?

1 / (1 + i) ^ n Signup and view all the answers

What is the purpose of calculating the Net Present Value (NPV) of a project?

To evaluate the project's viability and determine whether to accept or reject it Signup and view all the answers

What is the Return on Investment (ROI) of an investment that costs R500 and is worth R550 the following year?

10% Signup and view all the answers

What is the required rate of return for a project in Practical Application 2?

20% Signup and view all the answers

What is the initial investment for the project in Practical Application 2?

R50,000 Signup and view all the answers

What is the Net Present Value (NPV) of a project that has a total Present Value of R114,142 and an initial investment of R100,000?

R14,142 Signup and view all the answers

What is the purpose of calculating the Present Value (PV) of future cash flows?

To convert future cash flows to their equivalent value in today's dollars Signup and view all the answers

What is the Net Flow of a project with an inflow of R20,000 and an outflow of R0?

R20,000 Signup and view all the answers

What is the purpose of using a Discount Factor in calculating the Net Present Value (NPV) of a project?

To convert future cash flows to their equivalent value in today's dollars Signup and view all the answers

Study Notes

Here are the study notes for the text:

Organisational Strategy and Projects

The fundamental objective of many organisations is to make a profit, and projects are used to convert strategy into new products, services, and processes.
Project managers must understand their organisation's mission and strategy to make informed decisions and adjustments.
Project managers should be able to demonstrate how their projects contribute to the firm's overall strategy.

Importance of Aligning Projects to Overall Strategy

It is important to align projects to overall strategy to ensure that resources are focused on achieving the organisation's goals.
If projects are not aligned to strategy, they may not be focused on achieving the organisation's goals.
Aligning projects to strategy helps to ensure that the organisation is working towards a common goal.

Project Selection

Projects cannot be selected based on intuition or popularity; a selection process must be carried out to determine which projects to pursue.
The selection process involves evaluating projects against a set of criteria, gathering data and information, and evaluating each project against the criteria.

Project Selection Models

There are two types of project selection models: numeric and non-numeric models.
Numeric models use numbers as inputs for the decision process involved in selecting projects.
Non-numeric models do not employ figures as decision inputs, relying instead on other data.

Non-Numeric Models

Focus on Strategy and Organisational Needs: selects projects that align with the organisation's strategy and needs.
Implementing a Balanced Scorecard: uses a methodology to select and manage projects that align with business strategy.
Checklist Model: uses a list of criteria to evaluate projects and select the best option.
Multi-Weighted Scoring Model: uses several weighted selection criteria to evaluate project proposals.

Numeric Models

Payback Analysis: measures the time it will take to recoup the project's initial investment.
Net Present Value (NPV) Analysis: calculates the expected net value by discounting all expected future cash inflows and outflows to the present time.

Payback Analysis

Measures the time it will take to recoup the project's initial investment.
Shorter paybacks are more desirable.
Emphasises cash flow, a key factor in business.
Disadvantages include ignoring the time value of money, assuming cash flows for the investment period, and not considering profitability.

Net Present Value (NPV) Analysis

Calculates the expected net value by discounting all expected future cash inflows and outflows to the present time.
If the NPV is greater than or equal to zero, accept the project; if the NPV is less than zero, reject the project.
Accept projects with higher NPV's than lower NPV's if all other factors are equal.### Return on Investment (ROI)
ROI is the rate of return on an investment, expressed as a percentage
Calculated by subtracting project costs from benefits and dividing by costs
ROI is always represented as a percentage
Projects with higher ROI are selected after considering other economic factors

Calculating ROI

Step 1: Calculate average annual profit
Step 2: ROI = (Average annual profit / Original investment) x 100
Example: ROI = (R550 - R500) / R500 x 100 = 10%

Example: Investment in a New Machine

Company investing R12 million in a new machine
Expected savings: Year 1 - R5 million, Year 2 - R7 million, Year 3 - R6 million
ROI is calculated considering these savings and the initial investment

Project Selection Methods

Scoring model: lists relevant criteria, weighs them according to importance and priority, and adds weighted values
Project with the highest score is chosen
Organizational strategy is a major factor in project selection methods

Importance of Linking Projects to Organizational Strategy

Projects should have a clear link to organizational strategy
This ensures alignment with company goals and objectives

Net Present Value (NPV) Calculation

NPV calculates the present value of future cash inflows
Example: Nondumiso (pty) Ltd investing R10,00,000 with expected cash inflows over 5 years
NPV calculation involves discounting the cash inflows using a discount rate (e.g., 9%)

Project Evaluation

Graphic design company evaluating two project proposals with 5-year lives
Project A promises R350, R800, R900, R750, and R200 in each year
Project B promises R2180, R100, R100, R40, and R300 in each year
NPV calculation is used to evaluate and compare the projects

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Description

Learn about the importance of project management in achieving business objectives and improving profitability. Understand how organisations select and implement projects to support their business strategies.