SIT764 - PROJECT MANAGEMENT

(Trimester 1, 2015)

ASSIGNMENT 2

REPORT

Submitted by:
Robin Abraham
ID: 214423684

SIT74 - Project Management

Introduction:
This report analyses the 2 problems which are stated in the assignment and
recommends solutions based on the calculations that are carried on them. The first
part of the report suggests the most apt way to invest the profit of $40000 by
analyzing 4 different investment options. The second part of the report deals with
various parameters like Planned value, Actual cost, Earned value, Rate of
performance, etc.

Part I (Question 1)
(a):The discount rate is assumed to be 5.3%. The four investment opportunities
are analyzed below:
INSULATE OFFICE: This opportunity involves insulating the company offices
thus providing savings in fuel consumptions. The initial investment is $12000
and the benefits will be fuel savings of $1400 over the next 10 years.

Thus from the calculations carried out it is found that the NPV comes to $741.36 and the ROI is -7%

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SIT74 - Project Management

A payback graph is plotted with the cumulative discounted costs and

cumulative discounted benefits for this opportunity of insulating the office and is
represented as shown:

Payback of Project 1 (Insulate Office)

$12,000.00
$10,000.00
$8,000.00
$6,000.00
$4,000.00
$2,000.00
$0.00

Cumulative discounted costs

10

Cumulative discounted benefits

MORTGAGE PAYMENT:Here the opportunity is to pay the lump sum of $20000

to the mortgage of $40000 that the company has for a period of 10 years. The
interest rate is 7.5% per annum.

The following chart will show the benefit of having a mortgage of $20000 instead of
$40000

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SIT74 - Project Management

The calculations chart for NPV and ROI:

This opportunity yields a ROI of -18% while having an NPV of -$3331.65

A payback graph is plotted with the cumulative discounted costs and cumulative
discounted benefits for this opportunity of mortgage payment and is represented as
shown:

Payback of Project 2 (Mortgage Payment)

$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
1

Cumulative discounted costs

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Cumulative discounted benefits

10

SIT74 - Project Management

BUSINESS INVESTMENT:An opportunity exists where $10000 invested in a

new business willreap double the amount in 5 years.

This opportunity has a high ROI of 63% and will also yield a good NPV of
$5951.89

A payback graph is plotted with the cumulative discounted costs and cumulative
discounted benefits for this opportunity of business investment and is represented as
shown:

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SIT74 - Project Management

Payback of Project 3 (Invest in Business)

$20,000.00
$15,000.00
$10,000.00
$5,000.00
$0.00
1

Cumulative discounted costs

10

Cumulative discounted benefits

SAVINGS IN BANK:Yet another option is to keep the whole profit of $40000 in a

savings account which will earn an interest of 5% per annum for the next 6
years only.

This opportunity has an NPV of $11,315.15 and an ROI of 5%

A payback graph is plotted with the cumulative discounted costs and cumulative
discounted benefits for this opportunity of putting the profit into savings and is
represented as shown:
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Payback of Project 4 (Savings)

$250,000.00
$200,000.00
$150,000.00
$100,000.00
$50,000.00
$0.00
1

Cumulative discounted costs

(b):

10

Cumulative discounted benefits

The four investment opportunities are analyzed and a weighted scoring

model is constructed with the help of following data:

Criteria
Projects calculated
NPV
Projects calculated
ROI
Payback analysis

Weigh
t

Metho
d1

Metho
d1

Metho
d2

Metho
d2

Metho
d3

Metho
d3

Metho
d4

Metho
d4

35%

25

8.75

15

5.25

35

12.25

40

14

25%
40%

25
25

6.25
10
25

25
20

6.25
8.00
19.50

40
50

10
20
42.25

20
35

5
14
33

The Weighted Scoring Model:

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SIT74 - Project Management

Method 4

Method 3
Payback analysis
Projects calculated ROI
Method 2

Projects calculated NPV

Method 1
0

10

15

20

25

30

35

40

45

From the analysis and the Weighted Scoring Model it is clear that the method 3 is the
best opportunity in terms of using the money.
Method 1 or the option of insulating the office is a great opportunity since it will
provide fuel savings and also enhance the image of the company as being green or
environmental friendly. But the initial expenditure of $12000 is bit high considering
the fuel savings we get for 10 years. Although if we considered a time period beyond
10 years the cost would have broken even within another year but since we are only
considering the time period of 10 years, this option cannot be implemented.
Method 2 involves paying a lump sum amount of $20000 against a mortgage of
$40000. Provided it reduces the mortgage amount and also reduces the interest
needed to be paid, the payback will not break even in 10 years time. It will require an
additional 2 years for the payback to occur which is not an option. This option is good
if we are looking to improve the credit history of the company and make it look more
stable.
Method 4 is the least risky option of getting assured returns on the investment. The
interest here is compounded although just for the next 6 years which means there will
be no interest for the remaining 4 years. Playing safe comes with a price and that is
low return of investments. The ROI for this option is just 5%. This doesnt seem like
much considering its for 10 years time. Thus this becomes another option to ignore.
Method 3 is the best opportunity that the company can pursue. Our company is
always synonymous with taking risks. Its major successes all root from pursuing major
risks. Investing into a new business is an opportunity that does not show up every
time. Its a great chance to venture out to newer areas of the market and make the
company multifaceted and diversified and since the company is pretty stable, it can
afford to invest into this. The return of investment is another reason for this
opportunity to be the best. We are reaping double our investments in 5 years time
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SIT74 - Project Management

which is more than what we get from any other option we have. Therefore my choice
for investing the companys profit will go to this opportunity which could also open up
newer opportunities in the future.

Part II (Question 2)
This Question deals with the various cost control factors that takes place during the
building of a new office for the company. The progress of the project is monitored
using the Earned Value Management or EVM.

(a):

The planned value for the entire project comes to $104,000

I
D

Task Name

1 Lay foundations
2 Build frame
3 Install pipes and electrical
4 Make house water-tight
Install internal walls and
5 bathroom
6 Install cabinetries

7 Paint house

Install light fixtures and

appliances
TOTAL

(b):

Cost
($)

15,00
0
31,00
0
7,000
12,00
0
17,00
0
11,00
0

5,000

6,000
104,0
00

Duration
(Expecte
d)

Duration
(Actual)

week
2 s
week
4 s
week
6 s
week
8 s
1 week
2 s
week
4 s
Schedule
overrun
week
2 s
Schedule
overrun
week
2 s
Schedule
overrun
4 wee
0 ks

week
2 s
week
4 s
week
6 s
week
8 s
week
12 s
week
4 s
week
1.2 s
week
2 s
week
0.7 s
week
2 s
week
0.9 s
42. wee
8 ks

Planned
Value
(PV)

15,000
31,000
7,000
12,000
17,000
11,000

5,000

6,000

104,000

At this point of time the project has completed task 4 and I the project

manager have managed to keep cost to the original planned budget.

i.

The Planned value when we consider tasks only up to 4 is $65,000

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I
D

ii.

iii.

Cost
($)

Task Name

15,00
0
31,00
0

Lay foundations

Build frame

Install pipes and electrical

Make house water-tight

Total

7,000
12,00
0

Duration
(Expecte
d)
week
2 s
week
4 s
week
6 s
week
8 s

Duration
(Actual)

Planned
Value
(PV)

2 weeks

15,000

4 weeks

31,000

6 weeks

7,000

8 weeks

12,000
65,000

The actual cost is basically sum of the costs which can be both direct and
indirect which is sustained in completing an activity or task during a set period.
Since at the given point of time, that is up to task 4, all the tasks are 100%
complete and thus no indirect costs, the actual cost of the project is same as the
planned value that is $65,000
Rate Of Performance (ROP):
The rate of performance for each task up to task 4 is 100% as there is no
hurdles that occurred up until this point.
ROP = 100% (for every task up to 4)
Earned Value (EV):
RP is found to be 100%
PV is Planned Value
EV= (PV1 x RP1) + (PV2 x RP2) + (PV3 x RP3) + (PV4 x RP4)
EV= (15000 x 100%) + (31000 x 100%) + (7000 x 100%) + (12000 x 100%)
EV = $65000

I
D

Task Name

Lay foundations

Build frame
Install pipes and
electrical
Make house watertight

3
4

Cost
($)

Duratio
n
(Expect
ed)

Plann
ed
Value
(PV)

Actu
al
costs
(AC)

15,0
00
31,0
00
7,00
0
12,0
00

week
2 s
week
4 s
week
6 s
week
8 s

15,00
0
31,00
0

15,0
00
31,0
00
7,00
0
12,0
00
65,0
00

Total

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7,000
12,00
0
65,00
0

Rate of
Performan
ce (RP)

100%
100%
100%
100%

Earne
d
Value
(EV)
15,00
0
31,00
0
7,000
12,00
0
65,00
0

SIT74 - Project Management

Schedule Variance (SV):

SV = EV- PV
SV = 65000-65000 = 0
SV = 0
This shows that up to this point, the project is on time.
Cost Performance Index (CPI):
CPI = EV/AC
CPI = 65000/65000 = 1 or 100%
CPI=100%
Schedule Performance Index(SPI):
SPI = EV/PV
SPI = 65000/65000 = 1 or 100%
SPI = 100%

I
D

Task Name

Lay
1 foundations
2 Build frame
Install pipes
3 and electrical
Make house
4 water-tight

Cost
($)

15,000
31,000
7,000
12,000

Duration
(Expected)

week
2 s
week
4 s
week
6 s
week
8 s

Plann
ed
Value
(PV)

Actua
l
costs
(AC)

15,00
0
31,00
0

15,00
0
31,00
0

7,000
12,00
0

7,000
12,00
0

(c):
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Rate of
Perfor
mance
(RP)
100%
100%
100%
100%

Earne
d
Value
(EV)
15,00
0
31,00
0
7,000
12,00
0

Cost
Perfor
manc
e
Index
(CPI)

Sche
dule
Perfor
manc
e
Index
(SPI)

100%

100%

100%

100%

100%

100%

100%

100%

SIT74 - Project Management

Due to the unfortunate event where the two trades resigned after task 5, the task 6, 7
and 8 exceeded its initial cost and schedule by 30%, 35% and 45% respectively. This
in turn affected the various other values like CPI, SPI, AC, etc.
i.

ii.

iii.

From the calculations done in the excel sheet (shown above), the following
results are realized:
The CPI of the project at the end is 90%
The SPI of the project at the end is 93%
The performance with respect to time and money has definitely suffered due to
the resignation of 2 trades. But the tasks 6, 7 and 8 had a short duration when
compared to the duration for completing tasks 1 to 5. The cost for the 3 affected
tasks was also much lower than the cost for tasks 1 to 5. This led to the
minimization of the damage to the whole project planned value. This is reflected
in the high CPI of 90% and the high SPI of 93% at the end of the project. Thus
the performance with respect to both time and money is really good considering
the events that occurred.
The planned Value (PV), Earned Value (EV), and the Actual Costs (AC) can be
represented as a chart by plotting it using the following values obtained from
the excel sheet:

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$120,000
$100,000
$80,000

Planned Value (PV)

Actual Cost (AC)
Earned Value (EV)

$60,000
$40,000
$20,000
$0
1

Planned value, Actual cost and Earned value

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