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Essential Reading
Field, M. and Keller, L. (2007) Project Management. London: Open University Press (pp. 35 - 48; 123-145;
109-122) Study Guide: pp. 65-87
Additional Reading:
Schwalbe, K. (2009) An Introduction to Project Management. 2nd Ed. Boston: Cengage Learning (pp.147 -151)
Pinto, J.K. (2012) Project Management A Competitive Advantage. 2nd Ed. London: Pearson Education
Limited (pp. 247-266; 219-238)
Maylor, H. (2010) Project Management 4th ed. Edinburgh: Pearson Education Limited (pp. 174-198; 217-225)
Unit Learning Outcome
Managing Risks
Risk Management/Risk Assessment
Summary
References
Clear project objectives and a project definition document are essential to the
success of the project.
Estimating Methods
i How long will it take to pay back its cost?”
' On the other hand, the payback period will be 5 years if the
initial investment is £150,000.
' (Activity) How do you explain the popularity of the payback method, given
the limitations of this method?
Payback Worked example
Project A
Initial £200,000
investment
Cash inflows
Year 1 £100,000
Year 2 £100,000
Year 3 £100,000
Year 4 £100,000
8
Task 2 Smith Company
Project B
Initial £100,000
investment
Cash inflows
Year 1 £10,000
Year 2 £20,000
Year 3 £40,000
Year 4 £40,000
9
Advantages & Disadvantages
10
Takes into consideration all the relevant cash flows associated with a
project during its life and also when the cash flows will occur.
Cash flows occurring in future years are then adjusted to a present value.
12
The Time Value of Money
For example: the annual interest rate is 10%, I lend you £1 now and will get it back
after 1 year, how much worth of that £1 in a year’s time?
? x (1+10%) = £1
? = £0.91
10% is called “cost of capital”; “0.91” is called the “discount factor”
13
NPV
14
Brown Company
15
Gracie Company
16
Advantages &
Disadvantages
Method Advantages Disadvantages
NPV Takes account of the time Difficult to be
value of money understood
Concerns of shareholder by managers
wealth Adverse effects on
Takes account of risk accounting profits in the
Looks at the whole life of short run
the How to choose discount
project rate?
17
Reverse assumpt io n o f NPV.
19
Brown Company IRR using 23%
Bottom up: Estimates the activities at the bottom of the WBS first and
then works up through the WBS.
Total the direct costs from each activity estimate sheet. Remember to include
project management costs.
Top-Dow n Budgeting:
Financial accounting
Management accounting
Project accounting
i Risk management is all about deciding what to do about risk.
risk reduction
risk avoidance
risk acceptance
risk transfer
“Risk is an inherent - and inevitable - characteristic of projects risk represents the chance
of adverse consequences or loss occurring” (Field and Keller, 2007. p.109)
-Litigation
-Financial Loss
The Process
Monitor
17
Risk Assessment
Identifies risks
Probability /Impact
Low/high- Low /high
Risk Assessment of 25 metre swimming pool
5 5
People diving into swimming pool
Drowning 5 5
Slipping on Pool Side 5 5
31
Depth Case
32
Risk Management
- Contingency plans
R isk I d entifica t i on
http://www.youtube.com/watch?v=qKFrhYJvlc8&feature=related
i Clear project objectives are essential to the success of the project.
i If the objectives are unrealistic or not written down then the project is in
serious trouble before it has started.