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Project Life Cycle Models

Transcribed image text: Software project decision point. 1. You need to determine an interest rate to use -select an interest rate and explain why you think this number should be used. Use it in your calculations in item 1.2 2. Given the information below on options 1 and 2, carry out ms of analysis: breäkeven. ROl a 3. Make a recommendation on which way to proceed, based on the TCO for each option. Option 1: Purchase the FunSoft package: Cost $200,000 for software and $85,000 for hardware in year one; with $50,000 to customize it and a $40,000 annual licensing fee for the life of the contract. There will be an annual saving of $61,000 due to the layoff of a clerk. Option 2: Purchase the SoftComm package, which will operate on the vendor’s hardware: Cost $250,000 for a five- year license, payable half up front and half during the first year of implementation. The maintenance contract, at $75,000 a year, includes all currently identified modifications to the software for the first three years. The clerk’s hours will be cut by half, for a saving of $25,000 a year. In both cases, sales are expected to increase from the current $1 million a year, by 10% per year each year (over each year’s previous year’s sales) after full implementation. Assume a five-year life for the software. Dopreciat’en years

Solution

Question I – Go online and search for project life cycle models. Identify at least two that are different from the PMI model, and compare and contrast the phases. Be sure to cite your sources.

Question II – Software project decision point.

You need to determine an interest rate to use—select an interest rate and explain why you think this number should be used. Use it in your calculations in item 1.2.

Given the information below on options 1 and 2, carry out three forms of analysis: breakeven, ROI, and NPV.

Make a recommendation on which way to proceed, based on the TCO for each option.

Option 1: Purchase the FunSoft package: Cost $200,000 for software and $85,000 for hardware in year one; with $50,000 to customize it and a $40,000 annual licensing fee for the life of the contract. There will be an annual saving of $61,000 due to the layoff of a clerk.

Option 2: Purchase the SoftComm package, which will operate on the vendor’s hardware: Cost $250,000 for a five-year license, payable half up front and half during the first year of implementation. The maintenance contract, at $75,000 a year, includes all currently identified modifications to the software for the first three years. The clerk’s hours will be cut by half, for a saving of $25,000 a year.

In both cases, sales are expected to increase from the current $1 million a year, by 10% per year each year (over each year’s previous year’s sales) after full implementation.

Assume a five-year life for the software.Answer for Question no. 1.

Different types of projects life cycle model

There are three types of project life cycle model

  1. Predictive ( also known as fully plan – driven )
  2. Iterative and Incremental
  3. Adaptive ( also known as change – driven or agile )
  4. Predictive Model : In a predictive life cycle, the three major constraints of the project, the scope, time and cost are determined ahead of time not just at a high level. According to this model the project has been divided into phases where be check that is it a sequential or overlapping in nature. Now the planning can be done for the whole project or it can be broken down into rolling wave planning where planning will be done in phased manner.

Once the whole planning is broken down into pieces, we need to prepared the planning for first stage and once it is completed we go for next phases. Do not confuse with the scope of planning it is a predictive life cycle planning the detailed scope of the project is done right from the start.

  1. Iterative and incremental : according to this model the project is split up into phases which can be either sequential or overlapping. Unlike the predictive life cycle however, the scope is not determined ahead of time at a detailed level, but only for the first iteration or phase of the project. Once that phase is completed, the detailed scope of the next phase is worked out and so on.
  2. Adaptive : Adaptive life cycle model are used mostly in IT projects where there is a rapid change, sometimes the processes within the iterations can even be going on in parallel.

Like the iterative and incremental life cycle , the detailed scope is only determined ahead of a time for the current iteration or phase of the project. The phases or iterations are more rapid than in the iterative and incremental life cycle, During the iteration the scope is decomposed into a set of requirement and the work is done to meet those requirements.

At the end of iteration the work on the product is reviewed by the customer and the feedback from the customer is used to set the detailed scope of the next iterations.

References : https://4squareviews.com/2013/02/01/5th-edition-pmbok-guide-chapter-2-project-life-cycle-types-predictive-iterative-agile/

PMI model : According to PMI model of project life Cycle we are having five phases which is as follows.

Phase 1 : Project initiation: This is the start of the project and the goal of this project is to define the project at broad level. This is also called inception of the project where we gather the idea of starting different projects and it is called initiations. Important stakeholder will do their due diligence to help decide the project and in this phase we mostly finalize that which project we are going to invest into.

Phase 2 : Project planning : Once the project has been initiated and decided by all the stake holder point of view by the board of directors we go and do the project planning, this phase is key to successful project management and focusses on developing a roadmap that everyone will follow. Two of the post popular method for settings goals are S.M.A.R.T and CLEAR methods.

With the various tool we make sound planning and this only will help us in the implementations.

  1. Project Execution: Once the planning work is finished it is broken down into multiple phases and the real execution work will be started. A kick off meeting usually marks the start of the project execution phase where the teams involved are informed of their responsibilities.
  2. Project performance / Monitoring : In this phase we will monitor the project execution performance . we will compare with planning and real execution and according to that we will monitor the project performance.
  3. Project Closure : This phase represents the competed project contractors hired to work specifically on the project are terminated at this time. Once the project is completed PMS still have a few tasks to complete. They will need to create a project punch list of things that did not get accomplished during the project and work with team members to complete them .

References : https://www.smartsheet.com/blog/demystifying-5-phases-project-management

SO we can see that the PMI model of project life cycle has got five phases and we start from initiation phase to planning phase to execution phase to monitoring phase and than closure phase. But we could see 3 different model of project management above which approach was quiet different than PMI MODEL where we have discuss about 3 different model of project management .

  1. Predictive ( also known as fully plan – driven )
  2. Iterative and Incremental
  3. Adaptive ( also known as change – driven or agile )

Q 2: Assumption

Option 1 : Rate of interest : 10% ( Assumed as it is a normal rate of return)

Rate of Taxation : nil ( assumed as nil as nothing has been mentioned in the questions

Working Note : Calculation of Sales as there is increase in the sales @ 10 % every year .

Amount in $

ParticularsYear 0Year 1Year 2Year 3Year 4Year 5
Sales1,000,0001,000,0001,210,000133100014641001,610510
With increase of 10% every year on year100,000121,000133,100146,410161,051

Year 0 : Total Cost

ParticularsCash outflow
FunSoft$ 200,000
Harware$ 85,000
Customisation Cost$ 50,000
Total$ 335,000

If straight Line method of depreciation is considered than the annual depreciation = 335,000/ 5 = $67,000 p.a

Present Value of cash Outflow as per the time has been mentioned.

ParticularsCash outflowDiscounting FactorPresent Value
FunSoft$ 200,0001$ 200,000
Harware$ 85,0000.909$ 77,265
Customisation Cost$ 50,0000.909$ 45,450
Total$ 335,000$ 322,715

Note : it has been assumed that initial investment has been made upfront and rest is paid in one year time, we have assumed that it has been paid at the end of first year .

Calculation of Cash Inflow

ParticularsYear 1Year 2Year 3Year 4Year 5
Increase in Sales100,000121,000133,100146,410161,051
Annual Savings in clerk salary$61,000$61,000$61,000$61,000$61,000
Less : Annual Licencing Fees$40,000$40,000$40,000$40,000$40,000
Less: Dep$ 67,000$ 67,000$ 67,000$ 67,000$ 67,000
Profit before tax /PAT$54,000$75,000$ 87,100$ 100,410$ 115,051
CFAT = PAT+DEP$1,21,000$142,000$154,100$167,410182,051

Calculation

Break Even Analysis (Financial) – is going to be a kind of pay back period

ParticularsCFATCUM. CFAT
Year 1$ 121,000$ 121,000
Year 2$ 142,000$ 263,000
Year 3$ 154,100
Year 4$ 167,410
Year 5$ 182,051

So we need additional amount to break even in 3 rd year = $ 335,000- $ 263,000 = $ 72,000

Hence Break Even Period (Financial ) = 2 years + $72,000/ $154,100

Hence Break Even Period = 2. 4672 years

= 2 years 6 months approximately .

2.

ROI : Avg. PAT / Capital Employed

Avg. PAT = $ 54,000+ $ 75,000 + $ 87,100 + $ 100,410 + $ 115,051 / 5

Avg. PAT = $ 86,312

ROI = $86,312 / $335,000 * 100 = 25.76 %

3 Calculation of NPV at discounting rate of 10%

ParticularsCFATDiscounting ValuePresent Value
Year 1$ 121,0000.909$ 109,989
Year 2$ 142,0000.826$ 117,292
Year 3$ 154,1000.752$ 115,883
Year 4$ 167,4100.683$ 114,341
Year 5$ 182,0510.621$ 113,054
Total PV$ 570,559
Less: Cash Outflow$ 322,715
NPV$ 247,844

Assumptions : Rate of taxation has been taken nil as nothing has been mentioned, If taxation rate would have been mentioned it would have been impacted on CFAT. Depreciation has been charged on SLM basis. And the Cost of capital has been taken @ 10 %.

Option 2.

Initial Cash outflow

Purchase Cost of SoftComm = $ 250,000 payable half up front and half during the year .

Present Value of cash Outflow as per the time has been mentioned.

ParticularsCash outflowDiscounting FactorPresent Value
FunSoft$ 125,0001$ 125,000
$ 125,0000.909$ 113,625
Total$ 250,000$ 238,625

Note: Half Payment made upfront and for half exact time has not been mentioned hence it has been taken as end of the first year.

Dep : On the basis of SLM = 250,000/ 5 = $ 50,000

Calculation of Cash Inflow

ParticularsYear 1Year 2Year 3Year 4Year 5
Increase in Sales100,000121,000133,100146,410161,051
Annual Savings in clerk salary$ 25,000$ 25,000$ 25,000$ 25,000$ 25,000
Less : Annual Licencing Fees$ 75,000$ 75,000$ 75,000————-
Less: Dep$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000
Profit before tax /PAT$ 0$ 21,000$ 33,100$ 121,410$ 136,051
CFAT = PAT+DEP$ 50,000$ 71,000$ 83,100$171,410$ 186,051

Calculation

Break Even Analysis (Financial) – is going to be a kind of pay back period

ParticularsCFATCUM. CFAT
Year 1$ 50,000$ 50,000
Year 2$ 71,000$ 121,000
Year 3$ 83,100$ 204,100
Year 4$ 171,410
Year 5$ 186,051

So we need additional amount to break even in 3 rd year = $ 250,000- $ 204,100 = $ 45,900

Hence Break Even Period (Financial ) = 2 years + $ 45,900/ $171,410

Hence Break Even Period = 2. 27 years

= 2 years 3 months approximately .

2.

ROI : Avg. PAT / Capital Employed

Avg. PAT = $ 0 + $ 21,000 + $ 33,100 + $ 121,410 + $ 136,051 / 5

Avg. PAT = $ 62,312

ROI = $62,312 / $250,000 * 100 = 24.92 %

3 Calculation of NPV at discounting rate of 10%

ParticularsCFATDiscounting ValuePresent Value
Year 1$ 50,0000.909$ 45,450
Year 2$ 71,0000.826$ 58,646
Year 3$ 83,1000.752$ 62,491
Year 4$ 171,4100.683$ 117073
Year 5$ 186,0510.621$ 115,538
Total PV$ 399,198
Less: Cash Outflow$ 238,625
NPV$ 160,573

Assumptions : Rate of taxation has been taken nil as nothing has been mentioned, If taxation rate would have been mentioned it would have been impacted on CFAT. Depreciation has been charged on SLM basis. And the Cost of capital has been taken @ 10 %.

Comparative Analysis

ParticularsOption 1Option 2
BEP2 years 6 Months2 years 3 months
ROI25.76%24.92%
NPV$247,844$ 160,573

By analyzing the above table I has been seen that according to 2 parameter it is better to invest in Option 2.

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