MODULE - 4

Infrastructure and Project Finance

Ms. Amira Zainab Khanum
Faculty
DOS&R in Business Administration
Tumkur University, Tumkur

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumkur University, Tumkur
 Table of Content

1. Project Selection
2. Constraints
3. Cost Benefit Analysis
4. Project Rate of Return
5. Developing Project Network
6. Network Techniques
7. PERT – CPM Models

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
 PROJECT SELECTION

• Project selection is a process to assess each project idea and select the project
with the highest priority.

• Projects are still just suggestions at this stage, so the selection is often
made based on only brief descriptions of the project. As some projects will
only be ideas, you may need to write a brief description of each project
before conducting the selection process

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Selection of projects is based on:

Benefits: A measure of the positive outcomes of the project. These are often described as "the
reasons why you are undertaking the project". The types of benefits of eradication projects include:
• Biodiversity
• Economic
• Social and cultural
• Fulfilling commitments made as part of national, regional or international plans and agreements.

Feasibility: A measure of the likelihood of the project being a success, i.e. achieving its objectives.
Projects vary greatly in complexity and risk. By considering feasibility when selecting projects it
means the easiest projects with the greatest benefits are given priority.
Note: A detailed review of a project's feasibility is conducted in the Feasibility Study Stage

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Constrained Optimization Methods of Project Selection

You can use any of the following constrained optimization methods to select a project:

Linear Programming Method of Project Selection: In this method, you look towards reducing the
project cost by efficiently reducing the duration of the project. You look for running an activity in its
normal time or the crash time. The crash time of the activity enables you to reduce the activity time
or the project as a whole.

Integer Programming Method of Project Selection: In this method, you look towards a decision
that works on integer values and not on fractional values. For example, producing a number of cars
can never be fractional.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Dynamic Programming Method of Project Selection: In this method, you break a complex
problem into a sequence of simpler problems. This method provides a general framework of
analyzing many problem types. In this framework, you use various optimization techniques to solve
a specific aspect of the problem. This method requires your creativity before you can decide if the
problem needs to use dynamic programming for its solution.

Multi Objective Programming Method of Project Selection: In this method, you make decision
for multiple problems with mathematical optimization. In case, in a multi objective programming, a
single solution cannot optimize each of the problems, then the problems are said to be in conflict
and there is a probability of multiple optimal solutions. A solution is called as non dominated if
values of none of the problem can be optimized without degrading values of another problem.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Cost Benefit Analysis of Project Selection

Step by Step:

When managing a project, one is required to make a lot of key decisions. There is always something
that needs executing, and often that something is critical to the success of the venture. Because of the
high stakes, good managers don’t just make decisions based on gut instinct. They prefer to minimize risk
to the best of their ability and act only when there is more certainty than uncertainty.

But how can you accomplish that in a world with myriad variables and constantly shifting economics? The
answer: consult hard data collected with reporting tools, charts and spreadsheets. You can then use that
data to evaluate your decisions with a process called cost benefit analysis (CBA). An intelligent use of cost
benefit analysis will help you minimize risks and maximize gains both for your project and your
organization

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
What Is Cost Benefit Analysis?

• Cost benefit analysis in project management is one more tool in your toolbox. This one has
been devised to evaluate the cost versus the benefits in your project proposal. It begins with a
list, as so many processes do.
• There’s a list of every project expense and what the benefits will be after successfully executing
the project. From that you can calculate the return on investment (ROI), internal rate of return
(IRR), net present value (NPV) and the payback period.
• The difference between the cost and the benefits will determine whether action is warranted or
not. In most cases, if the cost is 50 percent of the benefits and the payback period is not more
than a year, then the action is worth taking.

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
The Purpose of Cost Benefit Analysis

• The purpose of cost benefit analysis in project management is to have a systemic approach to
figure out the pluses and minuses of various paths through a project, including transactions,
tasks, business requirements and investments. Cost benefit analysis gives you options, and it
offers the best approach to achieve your goal while saving on investment

There are two main purposes in using CBA:

➢ To determine if the project is sound, justifiable and feasible by figuring out if its benefits
outweigh costs

➢ To offer a baseline for comparing projects by determining which project’s benefits are
greater than its costs

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
The Process of Cost Benefit Analysis

▪ According to the Economist, CBA has been around for a long time. In 1772, Benjamin Franklin
wrote of its use. But the concept of CBA as we know it dates to Jules Dupuit, a French engineer,
who outlined the process in an article in 1848.

While it’s not clear if this Founding Father followed this exact process, it has evolved to include
these 10 steps:
• What Are the Goals and Objectives of the Project? The first step is perhaps the most
important because before you can decide if a project is worth the effort, you need a clear and
definite idea of what it is set to accomplish

• What Are the Alternatives? Before you can know if the project is right, you need to compare it
to other projects and see which is the best path forward.

• Who Are the Stakeholders? List all stakeholders in the project

Ms. Amira Zainab Khanum M , Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
• What Measurements Are You Using? You need to decide on the metrics you’ll use to measure all
costs and benefits. Also, how will you be reporting on those metrics? With you can create eight
different project reports with just one click, including project status reports, variance reports and
more
• What Is the Outcome of Costs and Benefits? Look over what the costs and benefits of the project
are, and map them over a relevant time period
• What Is the Common Currency? Take all the costs and benefits you’ve collected, and convert them
to the same currency to make an apples-to-apples comparison.

• What Is the Discount Rate? This will express the amount of interest as a percentage of the
balance at the end of a certain period
• What Is the Net Present Value of the Project Options? This is a measurement of profit that is
calculated by subtracting the present values of cash outflows from the present values of cash
inflows over a period of time
Ms. Amira Zainab Khanum M, Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
• What Is the Sensitivity Analysis? This is a study of how the uncertainty in the output can be
apportioned to different sources of uncertainty in its inputs.

• What Do You Do? The final step after collecting all this data is to make the choice that is
recommended by the analysis.

How to Evaluate the Cost Benefit Analysis

• The data you collected is used to help you determine whether the project will have a positive or
negative consequence. Keep the following things in mind as you’re evaluating that information:

➢ What are the effects on users?

➢ What are the effects on nonusers?
➢ Are there any externality effects?
➢ Is there a social benefit?

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
• It’s also important to apply all relevant costs and benefits commonly. That is, the time value of the
money spent. You can do this by converting future expected costs and benefits into current rates

• Naturally, there is risk inherent in any venture, and risk and uncertainty must be considered when
evaluating the CBA of a project. You can calculate this with probability theory. Uncertainty is
different than risk, but it can be evaluated using a sensitivity analysis to illustrate how results
respond to parameter changes

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
How Accurate is Cost Benefit Analysis?

• How accurate is CBA? The short answer is it’s as accurate as the data you put into the process.
The more accurate your estimates, the more accurate your results.

Some inaccuracies are caused by the following:

• Relying too heavily on data collected from past projects, especially when those projects differ in
function, size, etc., to the one you’re working on
• Using subjective impressions when you’re making your assessment
• The improper use of heuristics (problem solving employing a practical method that is not
guaranteed) to get the cost of intangibles
• Confirmation bias or only using data that backs up what you want to find

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Are There Limitations to Cost Benefit Analysis?

• Cost benefit analysis is best suited to smaller to mid-sized projects that don’t take too long to
complete. In these cases, the analysis can lead those involved to make proper decisions.

• However, large projects that go on for a long time can be problematic in terms of CBA. There are
outside factors, such as inflation, interest rates, etc., that impact the accuracy of the analysis.

• There are other methods that complement CBA in assessing larger projects, such as NPV and
IRR. Overall, though, the use of CBA is a crucial step in determining if any project is worth
pursuing

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Project Rate of Return

• The internal rate of return on an investment or project is the "annualized effective

compounded return rate" or rate of return that sets the net present value of all cash flows (both
positive and negative) from the investment equal to zero

➢ Internal Rate of Return (IRR) is a project selection technique that takes a comparative approach for
selection. When you’re taking the PMI® PMP® exam, you should expect questions on IRR. In your
day-to-day life as well you can check with IRR to help make better decisions, such as whether to buy
insurance. Hence, IRR is a useful concept to know.
➢ To understand IRR, you first have to understand net present value (NPV). NPV, as the name
suggests, tells the net or total present value of cash flow for a project. Any project will encompass
investment, which is considered cash outflow. Also, a project is undertaken to give the organization
certain value back, which are cash inflows.
Ms. Amira Zainab Khanum M, Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
The formula for NPV is,

NPV = Present value (PV) of cash inflows (positive) + present value (PV) of cash outflows (negative)
• If NPV is positive, that’s good. You can consider the project for selection.
• If NPV is negative, it’s bad. The project shouldn’t be considered for selection.

The Definition of IRR

• Internal rate of return is the interest rate (or discount rate) at which the net present value for
the project is zero.
• In other words, the rate at which cash inflows equal cash outflows is considered as internal
rate of return. It’s called “internal rate of return,” because there are no other external
influences or environmental factors.

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
• As the cash inflows equal cash outflows, for IRR the NPV for the project will be zero. If we put it
mathematically, the equation would be:
NPV = 0
=> PV of cash inflows for the project (positive) + PV of cash outflows for the project (negative) = 0
=> PV cash inflows for the project = PV cash outflows for the project
• The rate at which present value of cash inflows equals PV of cash outflows will be the IRR. IRR is
always noted in percentage terms. To understand, let’s look at an example.
Ms. Amira Zainab Khanum M, Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
 Advantages and Disadvantages for IRR

Advantages of IRR Disadvantages of IRR

Considers time value of money (TMV) Calculation part is cumbersome if there are
unlike certain other calculations, such as uneven cash flows.
payback period.

Easy for selecting in projects. If IRR is IRR does not work if there are multiple
higher than the desired cut off rate, it's cash outflows, because it results in multiple
good. IRR.

Considers all cash flows for the project For mutually exclusive projects, it may not
over the years. be the sole selection criteria.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Developing Project Network

• A network in project management displays the duration of project activities and the dependencies
between activities graphically or as a table.

• How to conduct a network analysis

• We’ve talked a lot about the theory but how does a network analysis actually work and what do
you have to do? We’ll show you step by step how it works using a sample project – a
teambuilding event.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 1: Define Activities, Duration and Dependencies

• Create a list of all your project activities and estimate their duration. Then define the chronological
order of the activities, i.e. the dependence between them. Enter everything into a table:

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 2: Display All Activities in Nodes (rectangles) and Enter the Duration (d) into the Node.
Each node is displayed as follows:

•EST = Earliest Start Time = When can I start the activity at the earliest?
•EFT = Earliest Finish Time = When can I complete the activity at the
earliest?
•LST = Latest Start Time = When is the latest possible date to start the
activity if I want to complete the project on time?
•LFT = Latest Finish Time = When is the latest possible date to complete
an activity if I want to complete the project on time?
•d = duration of an activity (here in hours)
•CBT = Cumulative buffer time = extra time you can use to complete an
activity without compromising the project end date
•BT = free buffer time = extra time you can use to complete an activity
without compromising the completion time of its direct successor(s)
Ms. Amira Zainab Khanum M , Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 3: Link Activities
• Define the dependencies between activities. Predecessor and successor activities are linked by
an arrow – this enables you to see which activity or activities you have to complete before you
can start the next activity.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 4: Forward Planning
• Forward planning means that you start at the first activity and go through the activities #1-#8
chronologically. Add the EST (earliest start time) and EFT (earliest finish time). Here’s how you
calculate the times:
EST of activity #1 is always 0
EFT of an activity is the sum of its EST and duration >> EFT of activity #1 is: 0 + 1 (EST = 0, d = 1)
EFT of an activity is automatically the EST of its successor activity
If a node has more than one predecessor activity, the HIGHEST EFT is used >> EST of activity #6 is: 26
(taken from EFT of activity #2)

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 5: Backward Planning
This step enables you to calculate the latest start time (LST) and the latest end time (LFT). Start from
activity #8 and continue until you reach activity #1. Here’s how you calculate the times:
1.LFT of activity #8 is the same as its EFT and represents the starting point of the backward
planning: EFT = 66 = LFT
2.LST of an activity is: LFT – duration >> LST of activity #8 = 66 – 5 = 61
3.LST of an activity is also always the LFT of the predecessor activity >> LST of activity #8 = 61 so
the LFT of activity #7 = 61
4.If a node has more than one successor activity, the LOWEST LST is used >> activity #1 has 3
successor activities (activity #2,3,4). Out of the three successors, activity #4 has the lowest LST (=1)
so the LFT of activity #1 = 1.
5.You can check whether your backward planning is correct if LST = EST = 0 for activity #1.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Ms. Amira Zainab Khanum M , Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 6: Calculate the Buffer Times
The next step is to identify the cumulative buffer time (CBT) and the free buffer time (BT) for all activities.
Cumulative buffer time
•Formula for the CBT is: LST – EST >> So CBT for activity #6 is: 30 (LST) – 26 (EST) = 4
The cumulative buffer time indicates how much delay there can be in completing an activity before it
jeopardizes the project’s completion

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
•Formula for the BT is: EST of the successor activity minus the current activity’s own EFT. BT of
activity #3 is: 26 – 16 = 10 (EST of activity #4 = 26; EFT of activity #3 is 16)
•If an activity has more than one successor, take the LOWEST EST for the calculation. E.g. activity #4
has 2 successors (activity #5 and #6). EST of activity #6 = 26, EST of activity #5 = 21 >> BT of activity
#4 is 21 – 21 = 0
The free buffer time indicates how much delay there can be in completing an activity before it has an
impact on the completion time of the next activity

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Step 7: Determine the Critical Path
The critical path is the longest path (i.e. the path with the longest duration) from project start to finish.
The activities and milestone on this path have no buffer time. Which means that even the slightest delay
of one activity, the project’s completion will be delayed accordingly.
•In a network diagram every activity (node) without any cumulative or free buffer time belongs to the
critical path: CBT = BT = 0. In our case those are activity #1, #4, #5, #7 and #8.

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
So the critical path determines the minimum project duration and enables the project manager to identify
activities that are particularly risky should delays arise there. This helps them to devise countermeasures
from the start. It’s important the they keep a close eye on the activities on the critical path. On the other
hand, if you manage to complete a critical activity earlier than planned, you can decrease the duration of
the project accordingly.

Conclusion
• The network analysis is a very precise method but that means that it is also pretty complex. For smaller projects
with a smaller number of activities such as our teambuilding event, it’s feasible. But if you have a complex project
plan with a lot of activities, it’s not only complex to create a network diagram but it’s also complex and time-
consuming to keep it up to date. Which is why most use a project management software to create a network
diagram. Though it’s still helpful to know how to conduct a network analysis manually as it helps you to
understand your project plan better. The biggest advantage of a project management tool is that it calculates end
and start times automatically according to the dependencies and constraints you’ve defined, calculates the critical
path automatically and most importantly it takes much less time and effort to create a project plan .
Ms. Amira Zainab Khanum M, Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
Network Techniques:

A number of network techniques, given below have been developed in recent times:

• PERT- Programme Evaluation and Review Technique

• CPM- Critical Path Method
• RAMS- Resource Allocation and Multi-project Scheduling
• PEP- Programme Evolution Procedure
• COPAC- Critical Operating Production Allocation Control
• MAP- Manpower Allocation Procedure
• RPSM- Resource Planning and Scheduling Method
• LCS- Least Cost Scheduling
• MOSS- Multi-Operation Scheduling System
• PCS- Project Control System
• GERT- Graphical Evaluation Review Technique.
Ms. Amira Zainab Khanum M, Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
 PERT And CPM MODELS

Ms. Amira Zainab Khanum M, Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
Definition of PERT

• PERT is an acronym for Program (Project) Evaluation and Review Technique, in which planning,
scheduling, organizing, coordinating and controlling uncertain activities take place. The
technique studies and represents the tasks undertaken to complete a project, to identify the
least time for completing a task and the minimum time required to complete the whole project. It
was developed in the late 1950s. It is aimed to reduce the time and cost of the project.

• PERT uses time as a variable which represents the planned resource application along with
performance specification. In this technique, first of all, the project is divided into activities and
events. After that proper sequence is ascertained, and a network is constructed. After that time
needed in each activity is calculated and the critical path (longest path connecting all the events)
is determined
Ms. Amira Zainab Khanum M , Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
Definition of CPM

• Developed in the late 1950s, Critical Path Method or CPM is an algorithm used for planning,
scheduling, coordination and control of activities in a project. Here, it is assumed that the activity
duration is fixed and certain. CPM is used to compute the earliest and latest possible start time
for each activity.

• The process differentiates the critical and non-critical activities to reduce the time and avoid the
queue generation in the process. The reason for the identification of critical activities is that, if
any activity is delayed, it will cause the whole process to suffer. That is why it is named as
Critical Path Method

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
 BASIS FOR COMPARISON PERT CPM

Meaning PERT is a project CPM is a statistical

management technique, used technique of project
to manage uncertain activities management that
of a project. manages well defined
activities of a project.

What is it? A technique of planning and A method to control

control of time. cost and time.

Orientation Event-oriented Activity-oriented

Evolution Evolved as Research & Evolved as

Development project Construction project

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur
 Model Probabilistic Model Deterministic Model

Focuses on Time Time-cost trade-off

Estimates One time estimate
Three time estimates

Appropriate for High precision time Reasonable time

estimate estimate
Management of Unpredictable Predictable activities
Activities
Nature of jobs Non-repetitive nature Repetitive nature

Critical and Non- No differentiation Differentiated

critical activities
Suitable for Research and Non-research projects
Development Project like civil construction,
ship building etc.

Crashing concept Not Applicable Applicable

Ms. Amira Zainab Khanum M, Faculty,
DOS&R in Business Administration,
Tumk ur University, Tumk ur
 Thank You

Ms. Amira Zainab Khanum M , Faculty,

DOS&R in Business Administration,
Tumk ur University, Tumk ur