Lecture 3 Flashcards
9 General Planning Components
Objective, Program, Schedule, Budget, Forecast, Organisation, Policy, Procedure, Standard
Perspective project selection consists of 3 stages
Feasability study, Cost-Benefit Analysis, Setting of Milestones/Deadlines
What does the Feasibility Study consist of (8 steps)?
Initiation/outline, stakeholder analysis, define the clients needs, evaluate constraints, evaluate alternatives and options, gather information, value management, cost-benefit analysis
What is the purpose of a Cost-Benefit Analysis?
To ensure the project with provide financial and non-financial benefit
What are the two main types of benefits and what do they measure?
- Tangible - money - quantified and measurable
2. Intangible - everything other than money (often environment)
What is the Payback period (PP)?
The exact length of time needed to recover initial investment, calculated from cash inflows
What is the problem associated with calculating Payback period?
PP may contain great errors, it only takes into account the actual cash value, not time value of money. £1 today may not be worth £1 in the future
What is the Time value of Money?
This values the initial investment at a present day basis - by discounting final cash using a discount rate (scale factor) to arrive at the present day worth
What is the discount rate?
Effectively a scale factor used to discount final cash to find the present day value, this allows future costs and benefits to be evaluated and compared
Why is the Time value of Money so important for Engineering Projects?
Because of the time scale - engineering projects occur over many years. The end delivery must be quantifiable in relation to the initial proposal.
What is the Net Present Value used for?
To compare the Discounted cash flow Vs. the initial investment
When should Net present value, NPV be accepted?
If NPV=/>0 accept, if NPV <0 reject
What is the Internal Rate of Return, IRR?
The discount rate when NPV=0
Why is IRR often prefered over NPV?
It eliminates the need to determine a discount rate
How are IRR values ranked, and in what case can this determine the project to be unfeasable?
The higher the IRR, the more desirable the project (indicates profit at high discount rates - secure investment), if IRR is less than capital £ then the project is unfeasable