INF3708 EXAM NOTES

Cost-benefit evaluation techniques Formula for ROI Example of using ROI ROI for a project with net profit of R50k over a 5 year period Average annual profit: 50 000 / 5 = 10 000 Annual profit = R10k and a total investment of R100k ROI = 10 000 / 100 000 *100 = 10%   Discount factor t = the number of years into the future that the cash flow occurs r = the discount rate (annual rate by which future earnings are discounted) PV: Present value of a future cash flow NPV: Net present value for a project The net present value for a project with t years worth of cash flows is merely the sum of the present values for each year Abbreviations PV = planned value = budgeted cost of work scheduled BCWS   EV = earned value = budgeted cost of work performed BCWP   AC = actual cost of work performed ACWP   SV = schedule variance = EV − PV CV = cost variance = EV − AC BAC = total budgeted cost of project SPI = schedule performance index = EV/PV CPI = cost performance index = EV/AC ETC = forecast cost to complete = BAC EV /CPI where BAC is the budgeted cost at completion    EAC = estimated cost of at completion = AC + ETC BCSP = budgeted cost, scheduled performance = date where PV equals EV at status date TV = time variance Calculate payback period Break-even Year – Profit made in Break-even Year / Income in Break-even Year)  Definition INF3708 EXAM NOTES 2021. 2 The payback period is the time taken to break even or payback the initial investment. Normally the project with the shortest payback period will be chosen on the basis that an organization will wish to minimize the time that the project is in ‘debt’. Example Initial investment is – R195 000 So to get to break-even year, we subtract the next year(s) income until we have a negative amount. R 195 000 – R 15 000 – R 30 000 – R 55 000 – R 50 000 – R 55 000; and here we then have a negative of R 10 000. Thus, the Break-even Year is 5 The profit is what is left over in the 5th year after we paid off the full debt of R195 000, which is R 10 000. The income in the 5th year is R 55 000 Thus, the calculation is: Payback period is 5 – 10 000/ 55 000 = 4,82 years   PERT network diagram PERT (Program Evaluation Review Technique) network diagram is used to model a project’s activities and their relationships as a network. It was developed to take account of the uncertainty surrounding estimates of task durations. The difference between the CPM and the PERT methods is that the CPM uses a single estimate for the duration of each task, whereas the PERT method uses 3 estimates. These 3 estimates include Optimistic (a) Most likely (m) Pessimistic (b) These 3 estimates are combined to calculate the te values using the following formula After the te values are calculated, the standard deviation ( s ) can be calculated using the following formula The next step is to calculate the z -value using the following formula 3 PERT event labelling convention CPM diagram ( activity on arrow ) CPM labelling Example on how to do Draw a CPM network for the list of tasks in the table above to illustrate the interaction of activities 4