4 - Cost and Benefit Planning Flashcards
What is the main equation for cost planning…?
Price = Cost + Profit
What are the two approaches to costing?
- Price is fixed first (Top down)
- Cost is fixed first (Ground up)
What are the elemens of cost?
- Time
- Materials
- Overheads (project and general)
- Contingency
What is the equation for the learning effect?
Y = KX^n
Time required for X unit = Time required for first unit times X unit to the power n
What is “n” in the learning rate equation?
n = logb/log2 where b = learning rate
What is the learning rate?
The learning rate measures the rate of time deduction when activities are repeated.
What are the three types of estimates?
Ballpark - Preliminary when info is scarce
Definitive - Basic scope well understood
Parametric - Unit based approach where there is experience
What are some issues with cost estimates?
Low estimates Unanticipated difficulties Poor scope definition Specification change External factors
What are the 4 main factors that influence the quality of estimates?
Planning Horizon (how far in the future)
People
Organisation Culture
Planning Padding
What is financial appraisal?
It considers the potential rewards against potential costs.
What is Pay-Back-Analysis?
Form of financial appraisal that compares predicted income to initial investment. Does NOT take into account life-cycle cost or time value of money.
How is the time value of money evaluated?
Using discounted cash flow (DCF) to look at the new present value
What is the equation for present value?
Cn / (1+i)^n
What is the internal rate of return (IRR)
The discount rate at which NPV = 0
What 3 factors determine the discount rate?
- Rate for use of the capital
- Rate for inflation
- Premium factor for investor risk
