# 6 Conventional Methods

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### Slide 1:

1 SOFTWARE PROJECT MANAGEMENT Course Notes Chapter 3 Programme Management& Project Evaluation

### Conventional Methods :

Conventional Methods 2 ... We create a table of functions and estimate either size or effort associated with each ... Function-Task approach :

### Net profit :

Net profit ‘Year 0’ represents all the costs before system is operation ‘Cash-flow’ is value of income less outgoing Net profit value of all the cash-flows for the lifetime of the application 3

### Slide 4:

4 Pay back period This is the time it takes to start generating a surplus of income over outgoings. What would it be below?

### Return on investment (ROI) :

Return on investment (ROI) ROI = 5 Average annual profit Total investment X 100 In the previous example average annual profit = 50,000/5 = 10,000 ROI = 10,000/100,000 X 100 = 10%

### Net present value :

Net present value Would you rather I gave you £100 today or in 12 months time? If I gave you £100 now you could put it in savings account and get interest on it. If the interest rate was 10% how much would I have to invest now to get £100 in a year’s time? This figure is the net present value of £100 in one year’s time 6

### Discount factor :

Discount factor Discount factor = 1/(1+r)t r is the interest rate (e.g. 10% is 0.10) t is the number of years In the case of 10% rate and one year Discount factor = 1/(1+0.10) = 0.9091 In the case of 10% rate and two years Discount factor = 1/(1.10 x 1.10) =0.8294 7

### Applying discount factors :

Applying discount factors 8

### Internal rate of return :

Internal rate of return Internal rate of return (IRR) is the discount rate that would produce an NPV of 0 for the project Can be used to compare different investment opportunities There is a Microsoft Excel function which can be used to calculate 9

### Dealing with uncertainty: Risk evaluation :

Dealing with uncertainty: Risk evaluation project A might appear to give a better return than B but could be riskier Could draw up draw a project risk matrix for each project to assess risks – see next overhead For riskier projects could use higher discount rates 10

### Example of a project risk matrix :

Example of a project risk matrix 11

### Decision trees :

Decision trees 12 