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positive NPV
means that return from a project exceeds the cost capital and the return available from investing the capital elsewhere.
Discount rate
the interest rate used to discount cash flows
It takes into account not just the time value of money but also the risk or uncertainty of future cash flows
The greater the uncertainty of future cash flows, the higher the discount rate.
It is also called the capitalization rate or the opportunity cost of capital.
NPV calculations
Determine estimated costs and benefits for the life of the project and the products it produces.
Determine the discount rate
Calculate the net present value
Return on investment
a metric used to measure the profitability of an investment relative to its cost.
ROI Formula
___= (Total discounted benefits - total discounted costs)/discounted costs
Payback period
Is the amount of time it will take to recoup, in the form of net cash inflows, the total dollars invested in a project
Determines how much time will elapse before accrued benefits overtake accrued and continuing costs
Occurs when the net cumulative discounted benefits equals the costs
Many organizations have requirements for the length of the payback period of an investment
Cost overrun
is the additional percentage or dollar amount by which actual costs exceed estimates
Cost
a resource sacrificed or foregone to achieve a specific objective or something given up in exchange
Usually measured in monetary units like dollars that must be paid to acquire goods and services
Project cost management
Includes the processes required to ensure that the project is completed with in an approved budget
Project cost management includes
Planning cost management
Estimating costs
Determining the budget
Controlling costs
Planning cost management
Determining the policies, procedures, and documentation that will be used for planning, executing and controlling project cost
Estimating costs
the process of forecasting the financial and other resources needed to complete a project within a defined scope
Determining the budget
Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
Controlling costs
Controlling changes to the project budget
Basic principle of Cost management
Most members of an executive board better understand and are more interested in financial terms than IT terms.
The terms executive members use to present and discuss project information
Profits
Profit margin
Life cycle costing
Cash flow analysis
Profits
Revenues minus expenditures
Profit margin
Ratio of profits to revenues
Life cycle costing
Considers total cost of ownership, or development plus support costs, for a project
Cash flow analysis
Determines estimated annual costs and benefits for a project and resulting annual cash flow
Tangible costs or benefits
are those costs or benefits that an organization can easily measure in dollars
Intangible costs or benefits
are costs or benefits that are difficult to measure in monetary terms
Direct costs
are costs that can be directly related to producing the products and services of the project.
Indirect costs
are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.
Sunk cost
cost is money, time, or effort that has already been spent and cannot be recovered.
Types of costs and benefits
Tangible
Intangible
Direct
Indirect
Sunk
Learning curve theory
When many items are produced repetitively, the unit cost of those items decrease in a regular pattern as more units are produced.
Help estimate costs on project that involve the production of large quantities of items
Reserves
are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict.
Types of Reserves
Contingency
Management
Contingency reserves
allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline.
Management reserves
allow for future situations that are unpredictable (sometimes called unknown unknowns)
Cost management plan includes
Level of accuracy
Units of measurement
Organizational procedure links
Control thresholds
Rules of performance measurement
Reporting formats
Process descriptions
Level of accuracy
rounding guidelines, guidelines for the amount of contingency funds to include
Units of measurement
each unit used in cost measurement, e.g. labor hours days, should be defined
Organizational procedure links
work breakdown structure (WBS) component used for project cost accounting as the control account (CA)
Control thresholds
a specific amount of variation allowed before action needs to be taken, e.g. 10 percent of the baseline cost.
Rules of performance measurement
cost measurement rules, e.g. how often actual cost will be tracked and to what level of detail
Reporting formats
format and frequency of the cost report required for the project
Process descriptions
describe how to perform all of the cost management processes
Estimating costs
the number and type of cost estimates vary by application area
Types of cost estimates for construction projects
Order of magnitude
Conceptual
Preliminary
Definitive
Control
Cost estimation tools and techniques
Analogous or top-down estimates
Bottom-up estimates
Three-point estimates
Parametric estimating
Analogous or top-down estimates
Use the actual cost of a previous, similar projects as the basis for estimating the cost of the current projects
Bottom-up estimates
involve estimating individual work items or activities and summing them to get a project total
Three-point estimates
involve estimating the most likely, optimistic, and pessimistic costs for items
Parametric estimating
Uses project characteristics (parameter) in a mathematical model to estimate project
Reason for Cost estimate Inaccuracies
Estimates are done too quickly
Estimates are done at various stages of the project, and project managers need to explain the rationale for each estimate
People lack estimating experience
Enabling IT people to receive training and monitoring on cost estimating will also improve cost estimates.
Human being are biased toward underestimation
E.g. senior IT professional make estimate for younger people, and extra costs needed or integration and testing on large IT projects
Software development estimate approaches
Labor Estimate
Function point estimate
Labor estimate
the supplier who developed the proof of concept project will provide the ___ estimate input
Function points
are a means of measuring software size based on what software does for end users
Composed of inputs, outputs, inquiries, internal and external interface data. It is most commonly used software size metric, followed by lines of code
Local Technical experts will make this estimate
User stories
are common ways to describe requirements in a simple, concise way.
Internal logical files (ILFs)
a group of logically related data that resides entirely within the application boundary and is maintained through external inputs.
Budgeting
involves allocating the project cost estimate to individual work items over time
Cost baseline
Time phased budget that project managers use to measure and monitor cost performance.
Activities involved in controlling project costs
Monitoring cost performance
Ensuring that only appropriate project changes are included in a revised cost baseline
Informing project stakeholders of authorized changes to the project that will affect costs
Earned value management
Project performance measurement technique that integrates scope, time and cost data
Given a baseline (original plan plus approved changes)
Determine how well the project is meeting scope, time and cost goals
Three Earned value management Values
Planned Value (PV)
Actual cost (AC)
Earned Value (EV)
Planned Value (PV)
Authorized budget assigned to scheduled work
Actual cost (AC)
Realized cost incurred for the work performed on an activity during a specific time period
Earned value (EV)
Measure of work performed expressed in terms of the budget authorized for that work
Cost Variance Equation
is the earned value minus the actual cost:
___ = EV - AC
Schedule Variance Equation
is the earned value minus the planned value
___ = EV - PV
Cost Performance Index Equation
is the ratio of earned value to actual cost
CPI = EV/AC
Project quality management
ensures the project will satisfy the needs for which it was undertaken
Project quality management processes
Planning quality management
Managing quality
Controlling quality
Planning quality management
identifying which quality standards are relevant to the project and how to satisfy them; a metric is a standard of measurement
Managing quality
translating the quality management plan into executable quality activities
Controlling quality
monitoring specific project results to ensure they comply with the relevant quality standards
Defect prevention methods
Selecting proper materials
Training and indoctrinating people in quality
Planning a process that ensures the appropriate outcome
Scope aspects of IT projects
Functionality
Features
System outputs
Performance Addresses
Reliability
Maintainability
Functionality
degree to which a system performs its intended function
Features
system’s special characteristics that appeal to users
System outputs
screens and reports the system generates
Performance
addresses how well a product or service performs the customer’s intended use
Reliability
ability of a product or service to perform as expected under normal conditions
Maintainability
ease of performing maintenance on a product
Kaizen
is the Japanese word for improvement or change for the better
Lean
involves evaluating processes to maximize customer value while minimizing waste
Benchmarking
generates ideas for quality improvements by comparing specific project practices or product characteristics to those of other projects or products within or outside the performing organization
Quality audit
is a structured review of specific quality management activities that help identify lessons learned and that could improve performance on current or future projects
Five Kanban Properties
Visual workflow
Limit work-in-process
Measure and manage flow
Make process policies explicit
Use models to recognize improvement opportunities
Acceptance decisions
Determine if the products or services produced as part of the project will be accepted or rejected
Rework
Action taken to bring rejected items into compliance with product requirements, specifications, or other stakeholder expectations.
Result from recommended defect repair or corrective or preventive actions
Result in requested changes and validated defect repair
Very expensive: project manager must strive to do a good job of quality planning and quality assurance to avoid this need.
Process adjustments
Correct or prevent further quality problems based on quality control measurements
Result in updates to organization process assets and the project management plan
Cause-and-effect diagrams
Trace complaints about quality problems back to the responsible production operations
Help find the root cause of a problem
Also known as fishbone or Ishikawa diagrams, named after their creator, Kaoru Ishikawa.
Control chart
Graphic display of data that illustrates the results of a process over time.
When a process is in control
any variations in the results of the process are created by random events.
When a process is out of control
variations in the results of the process are caused by nonrandom events
Seven run rule
If seven data points in a row are all below the mean or above the mean, or are all increasing or decreasing, then the process needs to be examined for nonrandom problems.
Checksheet
Used to collect and analyze data
It is sometimes called a tally sheet or checklist, depending on its format.
Scatter diagram
Help to show if there is a relationship between two variables
The closer data points are to a diagonal line, the more closely the two variables are related.
Histogram
Bar graph of a distribution of variables.
Each bar represents an attribute or characteristic of a problem or situation
The height of the bar represents its frequency.
Pareto chart
Histogram that helps identify and prioritize problem areas.
The variables described by the histogram are ordered by frequency of occurrence.
Help identify the vital few contributors that account for most quality problems in a system.
Pareto analysis
Referred to as the 80-20 rule
80 percent of problems are often due to 20 percent of the causes.
Flowcharts
Graphic displays of the logic and flow of processes
Help analyze how problems occur and how processes can be improved.
Show activities, decision points, and the order of how information is processed.
Run chart
Display the history and pattern of variation of a process over time.
A line chart that shows data points plotted in the order of occurrence.
Perform trend analysis and forecast future outcomes based on historical results.
Statistical Sampling
Choosing part of a population of interest for inspection
Size of a sample depends on how representative you want the sample to be
Sample size formula • Sample size = 0.25 x (certainty factor/acceptable error)2
Standard deviation
Measure how much variation exists in a distribution of data
A key factor in determining the acceptable number of defective units found in a population
Stages of software testing
Unit testing
Integration testing
System testing
User acceptance testing
Unit testing
Each individual component (often a program) to ensure it is as defect-free as possible