Project Planning:
Economic
Evaluation.
José Onofre Montesa Andrés
Universidad Politécnica de Valencia
Escuela Superior de Informática
Aplicada
2003-2004
Goal.
• Now that we have
the temporal project
plan to answer to:
–
–
–
–
What will be done?,
Who will do it?,
When will it be done?
And, What are the
necessary resources?
• We still have to
answer:
– How much will it cost?
– How will the resource
“capital” be applied?
GpiI-2F Project Planning: Economic Evaluation.
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Why?
• Money is important in
the enterprise world.
• Our projects live in
this context.
• Enterprises have a lot
of projects, and the
cost is an important
criteria.
GpiI-2F Project Planning: Economic Evaluation.
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The starting point...
• We have the project
program.
Tarea: Diseño
Programas
Tarea: Codificación
Program.
Recursos: …
Recursos: …
Duración: 4 semanas
Duración: 7 semanas
Tarea: Especifica
Necesidades
Tarea: Pruebas
Recursos: …
Recursos: …
Duración: 2 semanas
Duración: 2 semanas
Tarea: Realización
Esquema
Tarea: Diseño B.D.
Recursos: …
• We have the applied
resources at every
instant.
Recursos: …
Duración: 2 semanas
Duración: 1 semanas
TAREAS
Especificar Necesidades
Diseño Programas
Diseño Base de Datos
Realización Esquema
Codificación Programas
Pruebas
0
2
4
6
8 10 12 14 16
SEMANAS
6
5
4
3
2
1
1
2
3
4
5
6
GpiI-2F Project Planning: Economic Evaluation.
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8
9
1 0
3
Steps when creating the
economical study.
• Cash-flow calculation:
–
–
–
–
Unitary valuation of each resource,
Calculating the payment flow,
Calculating the income flow,
Obtaining the cash-flow.
• Financial study:
– Total volume of found to assign,
– Cash-flow present value.
GpiI-2F Project Planning: Economic Evaluation.
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The costs from the project
point of view.
• Directs:
– The ones that can be clearly assigned to the
project. For instance:
• Worked hours, consumed office materials...
• Indirects:
– It’s not easy to evaluate the added value to
the project, they are usually fixed in the
enterprise. For instance:
• Electricity, telephone...
GpiI-2F Project Planning: Economic Evaluation.
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Unitary cost valuation of every
resource.
• It must be applied all the project cost.
• Direct cost are easier to assign.
• Indirect cost are assigned as weigh up
of direct cost.
• In this way we have an assigned cost of
developers and not only they direct cost.
GpiI-2F Project Planning: Economic Evaluation.
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Obtaining the cash flow in a
project.
• We start by fixing
the payment
periodicity:
• We group the use of
resources by
periods,
– Days,
– weeks o Months.
(double entry table)
– resource,
– periods.
Resource\Month
Analyst
Designer
Programmer
Consultant
Tester
1
2
3
4
5
6
7
GpiI-2F Project Planning: Economic Evaluation.
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9
7
Calculating the payment flow.
• Sequence the project payment:
– Per resource consumption.
– Per each period.
Project
GpiI-2F Project Planning: Economic Evaluation.
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Obtaining the payment flow:
• For each period we accumulate the total
resources use multiply by it’s cost.
7
R16
R26
R36
R46
R56
R17
R27
R37
R47
R57
GpiI-2F Project Planning: Economic Evaluation.
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R18
R28
R38
R48
R58
Ri8*Ci
R15
R25
R35
R45
R55
6
Ri7*Ci
R14
R24
R34
R44
R54
5
Ri6*Ci
R13
R23
R33
R43
R53
4
Ri5*Ci
R12
R22
R32
R42
R52
3
Ri4*Ci
R11
R21
R31
R41
R51
2
Ri3*Ci
Payment flow
1
Ri2*Ci
Analyst
Designer
Programmer
Consultant
Tester
Indivi
cost.
C1
C2
C3
C4
C5
Ri1*Ci
Resource\Month
9
…
…
…
…
…
…
9
Accumulated payment
representation (S).
accumulated expenditure
20
15
10
Planed
5
0
0
1
2
3
4
5
6
7
8
9
GpiI-2F Project Planning: Economic Evaluation.
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Calculating the income flow.
• Set of received incomes by the
project development enterprise.
Project
GpiI-2F Project Planning: Economic Evaluation.
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Obtaining the income flow.
• For each period we accumulate the total
received incomes.
Resources/Month
Client
Subvention
Commisions
…
1
2
8
I11
I21
I31
I41
I18
I28
I38
I48
9
…
…
…
…
Income flow
Ii1 Ii2 Ii3 Ii4 Ii5 Ii6 Ii7 Ii8
…
I12
I22
I32
I42
3
I13
I23
I33
I43
4
I14
I24
I34
I44
5
I15
I25
I35
I45
6
I16
I26
I36
I46
7
I17
I27
I37
I47
GpiI-2F Project Planning: Economic Evaluation.
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Obtaining the cash-flow.
• It’s obtained subtracting the payment
flow to the income flow.
• It’s call cash-flow because if you
represent mentally a cash machine for
the project, it is the flow that you can
see.
Meses...
Flujo de ingresos
Flujo de Pagos
Flujo de Caja
1
8
9
…
…
I1-P1 I2-P2 I3-P3 I4-P4 I5-P5 I6-P6 I7-P7 I8-P8
…
I1
P1
2
I2
P2
3
I3
P3
4
I4
P4
5
I5
P5
6
I6
P6
7
I7
P7
GpiI-2F Project Planning: Economic Evaluation.
I8
P8
13
Calculate the cash flow in the
next project.
A
2A
B
1A
C
2A
D
1P
E
1A
F
4P
G
1A
H
2P
I
2P
J
2P
K
1P
1
2
3
4
5
6
7
8
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10
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Taking into account:
• Analysts costs is:
– 400 Euros per period.
• Programmers cost is:
– 200 Euros per period.
• The developer enterprise will receive
10.000 Euros at the end of task J.
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Graphic representation.
15000
10000
5000
0
-5000
-10000
Payment flow 800 1000 1200 900 1100 600 400
0
0
0
0
0
0
0
Income flow
-800 -1000 -1200 -900 -1100 -600 -400
Cash-Flow
Accumulated -800 -1800 -3000 -3900 -5000 -5600 -6000
400 200 200
1000 0
0
9600 -200 -200
3600 3400 3200
GpiI-2F Project Planning: Economic Evaluation.
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Financial study :
• Money isn’t easy to get in the
enterprise,
• It’s always compared with the
opportunity cost.
• This leads us to have to observe the
project from two points of view:
– Total volume of funds to assign,
– Updated cash flow.
GpiI-2F Project Planning: Economic Evaluation.
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Total volume of funds to
assign.
• All projects are taken into account in the
financial activity of the enterprise:
– They are capital expense, return and
– some needs in order to afford the payments.
• We must show the foreseen payments to be
inserted in the enterprise reality.
GpiI-2F Project Planning: Economic Evaluation.
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Total volume of funds to
assign, Example:
• We have a clear business,
– We must paid 20.000 euros each week during
one year,
– We will obtain 4.000.000 euros at the end of the
year,
– There are no risk.
• The business seems clear to everyone.
• Do you think that it’s possible?
– It´s hard to achieve
GpiI-2F Project Planning: Economic Evaluation.
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In this case: How much money does
the enterprise have to dispose?
15000
10000
5000
0
-5000
-10000
800
1000
1200
900
1100
600
400
400
200
200
Flujo Ingresos
0
0
0
0
0
0
0
10000
0
0
Pagos Acumul.
800
1800
3000
3900
5000
5600
6000
6400
6600
6800
Flujo de caja
-800
-1000
-1200
-900
-1100
-600
-400
9600
-200
-200
Acumulado
-800
-1800
-3000
-3900
-5000
-5600
-6000
3600
3400
3200
Flujo pagos
GpiI-2F Project Planning: Economic Evaluation.
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In this other case: How much money
does the enterprise have to dispose?
8000
6000
4000
2000
0
-2000
-4000
800
1000
1200
900
1100
600
400
400
200
200
Flujo Ingresos
0
0
2500
0
2500
0
0
4000
0
0
Pagos Acumul.
800
1800
3000
3900
5000
5600
6000
6400
6600
6800
Flujo de caja
-800
-1000
1300
-900
1400
-600
-400
3600
-200
-200
Acumulado
-800
-1800
-500
-1300
100
-600
-1000
2600
2400
2200
Flujo pagos
GpiI-2F Project Planning: Economic Evaluation.
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We will do the same job, but,
which is the best option?
• How much capital can
we use in order to
afford the project?
• Are euros equals: in
one month and the
next?
• What about the
risk?
GpiI-2F Project Planning: Economic Evaluation.
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Updated cash flow.
• In order to compare the profitability all
the projects need to have the same
conditions.
• Several methods are used:
– Net Present Value: NPV
– Return On Investment: ROI
– Internal Rate of Return: IRR
• We will use the NPV.
GpiI-2F Project Planning: Economic Evaluation.
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The rate “i”
• Money don’t have the
same value now and
in the future, and
even they have the
same value, lending
money have a risk
and the lender ask
for a rate.
• We call rate to:
Future 110
i

 0,1
Pr esent 100
• in %: the 10%
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Putting an amount in any
moment.
• The present value at the end of the
first period is:
present  future1  1  i 
1
• The future value in the n period is :
present  futuren  1  i 
n
• By induction.
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Comparing between the cashflow and the NPV
10000
8000
6000
4000
Cash-Flow
2000
NPV
0
-2000
1
2
3
4
5
6
7
8
9 10
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The accumulated in a project.
12000
10000
Cash-Flow
8000
6000
NPV
4000
2000
C-F Accumulated
0
-2000
-4000
-6000
1
2
3
4
5
6
7
8
9 10
Accumulated
updated
-8000
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The effects of delays in a
project
• Supposing there is a delay in the
project:
– How does it affect the cash-flow?
– How does it affect to the updated cashflow?
– How does it affect the updated
accumulated cash-flow?
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Bibliography
• Romero, C. Tecnicas de Gestión de Empresas. CEPADE / MundiPrensa, 1993. (Capítulo 2: Evaluzación financiera de proyectos de
inversión).
• DeMarco, Tom. Controlling Software Projects. Prentice Hall,
1982.
• Page-Jones, Meilir. Practical Project Management, Dorset House,
1985.
• Shtub, A., Bard, J.F. ,Globerson, S., PROJECT MANAGEMENT,
Engineering, Technology and Implementation, Prentice Hall
International, 1994. (Capítulos 2 y 3: Engineering Economic
Analysis; Project Screening and Selectión)
• Uriegas Torres, Carlos. Análisis Económico de Sistemas en la
Ingeniería, Limusa, 1987
GpiI-2F Project Planning: Economic Evaluation.
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