Project proposals

Question 1

Project Proposal

Answer 1

Can be the business case (for internal approval) or a bid (for external client)

Must be approved by someone.

This is not the same as PMP or project plan

Question 2

Business case

Answer 2

= the document that makes the case for doing the project and seeks authorisation and resources to undertake it

• sets out what and why of project
• assesses viability
• owned by the project sponsor

Question 3

Bid proposal

Answer 3

= document that makes the case to an external organisation to award the proposing organisation the business

Question 4

Give some examples of manager’s perception of benefits of project

Answer 4

financial (profit, ROI, cost effectiveness)
market (share, competitive advantage)
strategic fit with LT strategic aims
societal gain

Question 5

What risks do organisations consider?

Answer 5

Risks considered;

• financial
• market
• technical/logistical
• contractual
• people
• political

Question 6

3 methods of financial appraisal

Answer 6

Net Present Value (NPV)
Internal Rate of Return
Payback

Question 7

*Net Present Value (NPV)

Answer 7

• NPV discounts cash flow according to cost of borrowing so shows the case in terms of its present value (todays value) <br></br>
• organisations will expect a rate of return that is higher than the interest rate <br></br>
• Positive outcome means project earns more than cost of capital <br></br>
  NPV = 0 break even point, earns the same as cost <br></br>
  Negative outcome means project does not earn more than cost of capital, makes loss

Question 8

*Internal Rate of Return (IRR)

Answer 8

special case of NPV that works out the interest rate at which NPV = 0.
<br></br>
e.g. if the IRR is 18%, then the firm will aim to borrow at less than 18% interest rate.

Question 9

*Payback

Answer 9

measures how long before a project recovers its costs
- break even analysis in terms of time <br></br>
- can use simple or discounted cash flows <br></br>
- fast-moving markets <br></br>
<br></br>
cumulate costs per year and payback is when it equals zero

Question 10

Limitations of financial analysis

Answer 10

forecasts based on future, which cannot be predicted
<br></br>
numbers open to manipulation
<br></br>
different methods lead to different rankings of projects
<br></br>
does not consider opportunity cost of not doing project - competitor may develop new technology ahead of organisation

Question 11

Benefits of financial analysis

Answer 11

approximate base for evaluation and comparison
<br></br>
helps to identify drivers of profitability and risk
<br></br>
financial planning purposes
<br></br>
adds credibility to recommendation, gets rid of emotion and gut feeling