Business Project Management - Term Paper Example

? Business Project Management Table of Content Introduction 3 Discussion 4 Answer 4 Resources 4 Time 4 Money 5 Answer 2 5 Answer a 5 Answer b 6 Answer c 9 Conclusion 11 References 12 Introduction Project management is one of the most important business activities. It is a discipline that employs skills, knowledge and experience of employees involved in a project to achieve goal of project. Main objective of project management is to control cost, meet estimated and proposed deadline and reduce risk associated with the project and maintain quality of work. Project management process involves four major functions. These are planning, organizing, leading and controlling. Planning is the first stage of project management process and evaluation of a project is done in wide areas of the project i.e. cost required, future cash flow, possible risks etc. Project life cycle estimation is also important activity in this stage. Second stage of project management process is organizing. In this stage, the required resources are organized like capital, labour, material, equipment and facilities etc. Capital refers to both the initial investment and fund required for management working capital. Leading is the third stage project management process and it is very much crucial for completion of a project with quality work and ensuring deadline. The main objective of leading is to ensure right job to right people and motivating them to get best output. Controlling is the final stage of project management process where the project is continuously monitored. Progress of the project is evaluated and compared with the proposed project progress plan. Developing effective strategies and change of ineffective strategies of project development is main part of controlling a project (Smith, L. 2003, p.4). Therefore, overall objective of project management should be performing these four project management functions very efficiently and effectively in an organized framework. This is the job of a project manager. To complete or continue a successful project, the project manager needs to be planned and executed for each small stage of the overall project. This will help to develop and implement contingence in critical situation during project development process. Discussion Answer 1 Resources Resource is one of the most important primary objectives of a project. It includes mainly people, material and equipment i.e. the major non financial resources. Availability of skilled employees is one of the main focused areas of businesses because skill, knowledge and experience of employees have substantial impact on quality output and progress of a project. Again, sufficient supply of people leads to low wage rate and total wage of a project and vice-versa. Therefore, this important resource needs to evaluate at the planning stage of project management process so that project deadline, cost and quality work can be ensured. Next important resource is equipment which is very necessary to do the project task or activities. Technology plays a great role in this resource as use of hi-technology equipment reduces completion time or faster production and more output. Again, the employees also need to very much familiar with the advanced technology equipments as they need to operate the equipments efficiently to ensure better output. Material is another important resource of project as it is needed to produce the products. Therefore, sufficient and continuous supply of raw material is necessary for project. Material is necessary for both construction and production unit projects. Time Time is one important factor of project management. Project deadline and progress of a project can be ensured by efficient time management. It includes working hour of the employees and daily, weekly or monthly work progress. Again, time management can be aided by using tools, techniques and skills to accomplishing specific work activity or goal within due date. Therefore, to develop specific goal or work target, minimum time need to be considered to reduce total duration, increase daily or monthly productivity and reduce the cost of operation. Completion of each tasks of a project within pre-estimated duration is very important. Critical Path Method is used to estimates time needed to complete each task and so forth the overall project. Money Money is another important factor in project management. In includes cost, contingence and profit. Cost includes initial investment and operating cost during continuation of project. Therefore, business needs to be ensured sufficient flow of money from the project so that it can manage operating cost and cost of capital of initial investment. Profit from a project depends on its regular sustainable cash flow and cost of capital. Businesses need to ensure that cash flow is higher than cost of capital to make profit (Schwindt, 2005, p.4). Answer 2 Answer a Period (Years) Project A Net Cash flow Project B Net Cash flow 0 -6000 -6000 -6000 -6000 1 1400 -4600 2000 -4000 2 1400 -3200 2100 -1900 3 1800 -1400 1100 -800 4 1500 100 1500 700 5 1350 1450 1000 1700 6 1350 2800 1500 3200 7 1350 4150 1300 4500           IRR 15.45%   18.31%   PP (Years) 3.23   3.13   NPV 1225.86   1623.77   Cost of capital (Assumed) 9.00%   9.00%   Project B has higher internal rate of return, lower payback period and also higher net present value than project A. Therefore, project B should be selected. Answer b NPV is one of the important methods for evacuating investment viability of a project. It determines the present net worth of an investment. It evaluates the difference of discounted cost and discounted benefit from an investment. The result of this difference determines either benefit or loss from an investment. But this result does not consider the amount of money in the present term. Face value of an amount is considered with the value of money with respect to time, to calculate the future value the amounts are discounted to get the present value. Analysis of net present value is done by some procedure to find out the present value of an investment. The increments cash flow is very important and it is the first findings of the procedure process of NPV evaluation. Second important thing is discounted benefit from which is evaluated by discounting the different types of costs from the total benefit. Lastly the depreciation of assets is also discounted from the benefit value. The final value of benefit is the earning from a project before paying tax and other interest. Further the amount of tax is removed and depreciation is added to determine the free cash flow. Generally the there is no increase in the working capital is considered for most of the cases but it increases then the amount is added with the initial cost to find out the terminal cash flow. Opportunity cost is another important parameter which is considered to evaluate the total cost of capital investment in a project. To determine net present value from the free cash flow, weighted average working capital is taken as the discount rate of working capital. To judge the viability of a project or the acceptance of a project, higher positive value of NPV is expected from a project (Grossman & Livingstone, 2009, p.15). Another important method of investment analysis is internal rate of return analysis. It determines the interest rate the investor pay which can be compared to the cost capital percentage. The project is accepted if IRR is higher than the cost of capital. On the other, the NPV determines the amount of money the investor will gain or lose from the project. So NPV is the core decision maker compared to IRR. It is decided the financial analysts that NPV is the superior and better measure for the reason that in some investment cases IRR may not exist (Besley, Besley & Brigham, 2011, p.513). Payback period is an analytical tool of capital budgeting of any project. It determines the number of years the project takes to break even its initial investment or the initial expenditure or cost. The future cash flow are discounted by time zero whereas discounted payback period only determines the how long the project take to generate initial cash outflow which is used to pay back the initial investment. It is considered as the first payback instalment by a project for the capital invested in a particular project. Though it is an effective tool for evaluation of project, but it has also some disadvantages. So, NPV tells the true of worth of money investment in a project that means the future return from a project. If other circumstances does not changes in much difference or the does not affect the performance of a project then determined value of NPV determines the future return that likely similar to the actual return after competition of the given period of the project. S, it determines the most important factor of investment that is the future payback from a project. NPV is the only methods of investment analysis which eliminates the effect of major financial factors like inflation, change of interest rates etc from any amount of promised money NPV at any later date (Brigham, & Houston, 2011, p.371). NPV is important methods for an individual or an institutional investor that is going to accept a project where the investor able to determine judge the amount capital investment will pay back the return on investment. NPV is best methods among all the methods when comparison among the mutually exclusive project and when budget rationing is required at time limited resources an investor has. Other methods are not applicable in certain unique cases whereas NPV cover4s all type financial condition of the investor as well the target project. So, the investors always desire a high positive NPV value from any kind of project they like to invest (Sheeba, n.d., p.359). Answer c NPV Advantage NPV has higher importance in the financial management than other methods of investment analysis. It determines the present value of the future receipts or payments which are expected at present. A company needs an estimation of the possible cost and benefits from the project. NPV determines difference between the sum of discounted costs and the sum of discounted benefit. It is the key figures which only show the profitability of the investment decision. NPV determines whether a proposed investment can increase the future value of firm. It considers all the future cash flows and time value of money. It also considers risk of future cash flow as cost of capital is considered in NPV calculation. Disadvantage One of the major disadvantages of NPV is that project size can be measured with this method. Estimation of cost of capital is requiring calculating NPV and it is a limitation of it. NPV is expressed as value, not in percentage. IRR Advantage IRR determines the actual return of proposed investment in a project. It helps to calculate breakeven point of an investment. It also calculates alternative cost of capital which considers an appropriate risk premium. Disadvantage Internal Rate of Return cannot be used to comparative analysis of multiple project especially mutually exclusive projects. Multiple IRR problems are one majo9r limitation of this method. This problem occurs when negative cash flow occurs from a project. Payback Period Advantage Payback period determines the exact period when the invested amount can be repaid. It considers the difference between cash inflow and cash outflow from a project. Simplicity of evaluating payback period is major advantage. It provides efficient evaluation of small project with limited financing. Disadvantage In discounted payback method time value of money is not considered. It means, no matter year when, a project generate cash flow, same weight is given to the monetary value of the cash flow similar as the first year of the project when the investment is done in a project. This disadvantage results that the managers might overestimate the time to recovery of the initial investment. Second flaw of discounted payback method is the lack of consideration to cash flow beyond the payback period. If payback period is lower than the capital project duration, cash flows generated from the project after the recovery of initial investment are not considered in the calculation process of payback period. Third disadvantage of discounted payback method is that this method does not really determines a effective decision criterion as the business has to guess or estimate the interest rate or cost of capital for the calculation of discounted payback period which has substantial risk involved into as generally huge amount of investment is concerned in a project. Conclusion Importance of three main factors and three important methods of project valuation have analysed throughout the paper. Resources, time and money are three main components of project and feasibility and profitability of a project totally depends on these. Efficient project evaluation methods are net present value, internal rate of return and payback period. From the above comparative analysis of these three project valuation methods, it has been identified that net present value is most efficient to evaluate the feasibility and profitability of a project. There is a passivity to change the discounted rate or the cost of capital for the project. Payback period is highly dependent on the cash flow which is again dependent on economic environment like inflation, market rate, and supply of labour, material and equipments. But payback period does not consider these factors. So, this is the main disadvantage of payback period. Major advantage of payback period is that the company estimates breakeven of project i.e. when the project will provide positive cash flow. Therefore, NPV is the most efficient method of capital budgeting as it considers multiple factors and determines actual future value of project. References Besley S., Besley S. & Brigham E. F. 2011. Principles of Finance. United States: Cengage Learning. Brigham, F. E. & Houston, F. J. 2011. Fundamentals of Financial Management. Cengage Lerning. Chary, S. N. 1995. Theory and Problems in Production and Operations Management. Tata McGraw-Hill Education. Crosson, V. S. & Needles, E.B. 2010. Managerial Accounting. Cengage Learning. Grossman, T. & Livingstone, J. L., 2009. The Portable MBA in Finance and Accounting. Canada: John Wiley & Sons. Hasnson, R. D., Mowen, M. M. & Guan, L. 2007. Cost management. Cengage Learning. < Peterson P. P. & Fabozzi F. J. 2002. Capital Budgeting: Theory and Practice. Canada: John Wiley & Sons. Schwindt, C. 2005. Resource Allocation in Project Management. Springer. Sheeba K. No Date. Financial Management. New Delhi: Pearson Education India. Smith, L. 2003. Overview of Project Management. [Pdf]. Available at: http://www.iut-arles.up.univ-mrs.fr/thon/A2/approche_projet/overview_of_project_management.pdf. [Accessed on December 22, 2012]. Read More