Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
JANUARY SEMESTER 2011 MASTER PROJECT MANAGEMENT
ASSIGNMENT
LECTURER ASSOC PROF SAMIAPPAN MARAPPAN
STUDENT MOHD. NORIZAM BIN MD. SALLEH Matriculation No.: CGS 00534317
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
ANSWER ALL QUESTIONS Part A Question 1 You have been recently appointed as the project manager for a large project. The risk management team for this project has never used quantitative risk analysis in all of the projects that it has been involved with in the past. Prepare a presentation outlining the advantages and the techniques of quantitative risk analysis to this risk management team with the aim of encouraging its use by this team. [14 marks]
Answer 1 A Qua ntita tive Ana lysis often involves more sophi stica ted techni ques, usua lly requi ring computer softwa re. To some p eopl e this is the most ost form a l a spect of the who le p rocess requi ring : •
cost a nd time est estima tes. Measurement of uncerta inty in cost
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Probabilistic combina tion of indi vidua du al uncertainties.
with va rying levels of effort rang ing from Such techni ques ca n b e a ppl ied wit modes t to extensively tho roug h. It is recommended tha t new users sta rt slowly, p er ha ps even even igno ring this sub-sta ge, un til a clim a te of a cceptability ha s b een develop ed for Pro ject Risk Ana lysis a nd Mana an agement in the orga nisa tion.
an alysis is essen tial. It bring s cons ider a ble b enefit in lita tive ana An initia l qua lit term s of understa ndi ng the p ro ject and its p roblem s irrespective of whe ther or no t a qua ntita tive ana an a lysis is ca rried out. It m ay also ser ve to hi ghlight lities for risk “closure” i.e. the develo pm ent of a sp ecific pla n to dea l p ossibilit wit with a sp ecific risk issue. ’
lita tive ana lysis - Identifying a nd Assessing E xp erience ha s sho wn tha t qua lit R isks - us ua lly lea ds to a n initial, if simpl e, level of qua ntita tive ana an alysis. If, cost constra ints - b oth for a ny rea son - suc h a s time or resou rce p ressu re or cost a qua lit an alysis is imp ossible, it is the q ua lita tive ana an alysis lita tive a nd qua ntita tive ana tha t shoul d rem a in.
It should b e no ted tha t p rocedures for deci sion ma king will need to b e modified dopted. An exampl e which illus tra tes this p oint is the an alysis is a dopt if risk ana an ction decision for clien ts, wher e est sanc estim a tes of cost cost a nd time will b e produced in the form of ra ng es a nd a ssocia ted p roba bilit lities ra ther tha n sing le va lue Question 1 – Pg 1
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
figures.
The Quantitative Risk Analysis so called the numerically analyzing the effect of identified risk on overall project objectives are shown in Figure 1 and 2 below.
Figure 1: Perform Quantitative Risk Analysis: Inputs, Tools & Techniques and Output.
Figure 2: Perform Quantitative Risk Analysis Data Flow Diagram. Once all risks ha ve b een iden tified, dur du ring the qua lit an alysis, it may litative ana an alysis. This will enable b e appropriate to enter into a de tailed qua ntita tive ana the impa ct s of the risks to b e qua ntified a gains t the th ree ba sic p ro ject success cost, time a nd p er form ance. Sever a l techni ques ha ve b een develo p ed criteria; cost an alysing the effect of risks on the final cost cost a nd time-scale of p ro ject s. for ana However , suc h techni ques do no t a lways rea dily appl y them selves to the ana an a lysis of p erform ance objectives .
Question 1 – Pg 2
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
T he main techni ques cur ren tly in use a re: •
Sensitivity Ana lysis often cons ider ed being the simpl est est form of risk ana an a lysis. E ssen tially, it simpl y de term ines the effect on the who le pro ject of cha nging one of its risk va ria bles suc h a s delay s in design or cost of ma teria ls. Its imp orta nce is tha t it often highlights how the the cost effect of a sing le cha nge in one risk va riable ca n produce a marked difference in the p ro ject outcome.
In p ract ice, a sens itivity ana an alysis will b e p er formed for more tha n one risk, p erha ps all identified risks, in order to est esta blish tho se which ha ve a cost or time-scale of the p ro ject. The p otentially high im pa ct on the cost techni que ca n a lso b e used to address the impa ct of risk on the economic ret u r n of a pro ject.
One typical display of sensitivity analysis is tornado diagram, which is useful for comparing relative importance and impact of variables that have a high degree of uncertainty to those that are more stable.
Figure 3: Tornado Diagram - Project Risk vs Project Cost.
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Ana lysis sp ecifies a proba bility distribution for ea ch risk a nd then cons ider s the effect of risks in combi na tion. This is p erha ps the most ost comm on m et ho d of p er forming a qua ntita tive risk ana lysis a nd is the one most ost p eopl e consider , incorrect ly, to b e synony mous wit with the who le Pro ject Risk Ana lysis a nd Mana an a gement process. In fact , a s this Gui de illustra tes, it is but one fa cet of tha t p rocess. Proba bilistic
The most an alysis us es ’sampl ing ost comm on form of p roba bilist listic ana techniques’, us ua lly refer red to a s ’Monte Ca rlo Simul a tion’. This within a met ho d relies on the random calcul a tion of va lues tha t fall wit Question 1 – Pg 3
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
sp ecified probability distribution often des crib ed by us ing th ree est estim a tes: mini mum or optim ist istic, mea n or most ost likely a nd m a ximum or p essimist istic. The over all outcome for the p ro ject is der ived by the combina tion of va lues select ed for ea ch one of the ris ks. The calcul a tion is repea ted a num b er of times, p erha ps b et ween 100 and 1000, to obta in the proba bility distribution of the pro ject outcome.
an alysis wit listic time ana with the a id of a It is us ua l to ca rry out a proba bilist CPM ne twork to mo del the p ro ject schedule. The same met ho d ca n b e us ed for p roba bilist an alysis esp ecially when the cost listic cost cost ana cost est estima te ca n b e broken down into the same ca tegories or act ivities as the schedule a nd an alysis when cost cost risks a re rela ted to time risks. If a n independent cost cost ana is undertaken then. It may b e appropria te to use a spr eads heet m et ho d to der ive a histogram a nd cumul a tive cur ve from a proba bilist an alysis using listic time ana a model ba sed on a CPM ne twork. Ano ther techni que is the Controlled Inter va l and Mem ory Met ho d for combining p roba bility distributions which pr ovides a n alterna tive to Monte Ca rlo Simula tion. This techni que ca ns offer grea ter p recision for either compl ex CPM ne tworks or fee muc h less computerised effort if eit feedback loops are not involved.
Figure 4: Cost Risk Simulation Results.
Question 1 – Pg 4
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
an alysis. They Influence Dia grams a re a rela tively new techni que for risk ana provide a p ower ful m eans of cons truc ting models of the issues in a pro ject which a re subject to risk. As a resul t influence dia gra ms a re now us ed a s the user inter fa ce to a com puter ba sed risk model ling tool thus allowing an alyse the develo pm ent of ver y compl ex risk mo del s tha t ca n b e us ed to ana cost, time and economic pa ra met ers of p ro ject s. the cost
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Decision Trees a re a no ther gra phi ca l met ho d of struc tu ring m odels. They bring toget her the inform ation needed to make pro ject decisions a nd sho w the p r esen t p ossibl e courses of a ct ion a nd a ll futu re p ossible outcomes. E ach outcome mus t b e given a proba bility value indi ca ting its likeliho o d of an alysis is often us ed in the cost occurrence. This form of risk ana cost risk ana an a lysis of pro jects.
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Figure 5: Decision Tree Diagram The quantitative risk analysis advantages can be summarised as below; • • • • • • • •
More objectivity in its assessment. Offers direct projection of cost/benefit of a project/proposal. More powerful selling tool to company’s senior management. Can be fine-tuned to meet the needs of specific situations Can also be modified to fit the needs of specific industries Much less prone to arouse disagreements during management review Analysis is often derived from some irrefutable facts. Development of new security project proposal management skills
Question 1 – Pg 5
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103 •
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Potentially lure new business through the use of good quantitative analysis to tap into projects that were previously out of reach. Broaden existing consulting services by adding on cost-effective, high-ROI security improvement strategies and action plans. Better prioritizing of projects – can set priority based on ROI. Effective means to manage limited department resources. Easier to obtain funding from senior management. Improved performance metrics for the company/department as cost & benefit information can clearly define. Less susceptible to issues relating to company politics Reduced time requirement for assessing the validity of proposals Allows the end results to be tied to the company’s financial objectives more quickly
Conclusion Quantitative Risk Management helps to meet the probability of meeting the time and cost objectives. Helps to prioritizing high-threat risks and allows one to respond proactively before the problem erupted. Monitoring the risk trends closely shall enable you to control risk management treats over time. This shall help you to successfully manage the project risk and able to meet the project objectives which are completion within the limited time given, within budgeted cost at acceptable quality, safety and durability.
Question 1 – Pg 6
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Question 2 a. Identify the key features of the various commercial project management softwares available in the market. b. Explain in some detail how such softwares enable project risk management. [14 marks]
Answer 2 (a). There are so many project management software available in the market Project management software is a computer applications specifically designed to aid planning and controlling resources, costs and schedules of a project. Software project management is designed to avoid high failure rate. Software project management is a sub-discipline of project management. The various project management software available in the market, are namely Microsoft Office Project, Primavera, Project Manager Software, Web Based Project Management Software, S oftware, Project Pro ject Tracking Software, Sof tware, Software Sof tware Project Management Manage ment Tools, Project Management Software Tool, CPM Software, PERT Software, Gantt software and other such as PrioSoft’s Contractor Office, Basecamp, Central Desktop, Go Plan, Project Desk, Desk, Zoho, DotProject, CS Project – Crest Software Software and others. The followings are including but not limited to the following key features of the various commercial project management softwares; • • • • • • • • • • • • •
Record the WBS- the deliverables Break the deliverables into activities Assign durations, constraints, predecessors and successors to activities Calculate the start and finish dates Assign resources and/ or costs to activities Optimize the project plan Set Baselines to compare progress Approve work Record the actual progress Compare progress against the original plan Amend the plan for scope changes etc. and Produce management reports. Import/export format.
Question 2- Pg 1
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Project management software covers many areas, including estimation, planning, scheduling, cost control and budget management, resource allocation, collaboration software, communication, quick access to information and effective leveraging of existing data, which are used to deal with the complexity of large projects. Project management software can be very useful especially when there involve large and multiple larger projects. Effective work planning features shall be used to plan schedules, allocate resources, manage budgets, and set realistic expectations for the team, management, and customers. The data can easily track and estimates such as percent complete, budget versus actual cost, and earned value by using a set of predefined metrics. For example in construction works, we shall be able to manage the times and the budget efficiently. Scheduling is the process to allowed project managers to shift schedules such in easily way. The software leverages all task dependencies and types to automatically update the project schedule if the schedule changes. The following are the summary of features that offers by one of the project management software called Primavera . It was introduced in early 80’s, since then it has became very popular tool by schedulers, project managers, QS and claims consultants. In 1999, Primavera introduced an entirely new Critical Path Method (CPM) scheduling package designed for enterprise-wide project management which changed names almost yearly. P3 remained “P3” while this new enterprise-wide software is now called either P5 (short-hand for Primavera Project Manager™) or P6™ (for the Enterprise Version 6.) Primavera project management software e.g. Primavera P6 assists in tracking project scheduling, used for costs, estimation, resource leveling, time tracking, cost comparison and planning to measure progress toward objectives. It is the most powerful software, robust, and easy to use solution for globally prioritizing, managing and executing projects, programs and portfolios across the entire organization. Primavera is a user friendly data entries for all users even the beginner users shall also be able to operate the system easily. In other words, primavera is considered as. In addition the new features are more simplified and reduce training time and speed up adoption to all users. Primavera P6 are powerful web access for all users and all projects simultaneously, easy display for all the software functionality, easy Gantt use Question 2- Pg 2
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
such as graphic tool which objective is to show the estimated time investment for different tasks or activities in a determined total period, use of control panels for advanced decision making control and other. Primavera Project Manager Deployment & Implementation including but not limited to the following: 1.1. Software Installation, standalone and or network installation 1.2 Develop Organizational Structures, such as 1.2.1 Enterprise Project Structure (EPS) 1.2.2 Organization Breakdown Structure (OBS) 1.2.3 Resource Breakdown Structure (RBS) 1.3 Finance Graph. 1.4. Develop Global and Resource calendars 1.5. Create customized layouts, filters and reports 1.6. Develop schedule development, updating, control procedures Menu Schedule Development: Develop full cost and resource loaded schedule; 2.1. Create Work Breakdow Breakdown n Structure (WBS)
Figure 1: Project scope defined by using the WBS 2.2. Create project codes 2.3. Insert activities with logic, in consultation with your project team 2.4. Load schedule with budgeted labor and non labor hours, costs and expenses. Question 2- Pg 3
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
2.5. Create Target / Baseline schedule.
Question 2- Pg 4
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
2.6 .
Figure 2: Provide planned resource/cost loading reports. 2.7. Provide planned cash flows. 2.8. Bid and proposal schedule development. 2.9. Level 3 and level 4 detailed contract schedule development.
Menu Schedule Updating: 3.1. Update projects on regular set intervals which will include: 3.1.1. Collecting update data, 3.1.1.1. Estimate to Complete 3.1.1.2. % Complete 3.1.1.3. Actual hours/cost incurred 3.1.2. Entering data in to the schedule 3.1.3. Changing data date and recalculating the schedule
Question 2- Pg 5
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
3.1.4.
Figure 3: Identify problem areas 3.1.5. Report produced and all the informations and charts can be compiled. 3.1.5.1. Estimate to Complete (ETC) 3.1.5.2. Forecast at Completion (FAC) 3.1.5.3. Variance reports. Such as Schedule, Budget and Cost 3.1.6. Corrective action, can be done.
Menu Resource Analysis: Managing labour and non labour resources and cost /expenses associated with them by: 4.1. Producing planned resource loading / requirement reports 4.2. Updating schedule with actual resource usage / consumption
Question 2- Pg 6
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 4: Tracking Resources Chart. 4.3. Resource levelling. 4.4. Cash flow and analysis. Menu Performance Reports: Reports indicating health of the project at a certain point of time such as: 5.1. Activities Completion Report, number of activities completed against planned 5.2. Milestone Completion Report, number of milestone achieved against planned 5.3. Deliverables Completion Report, number of deliverables completed. 5.4.
Figure 5: Number of activities scheduled vs. completed in a reporting period Question 2- Pg 7
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
5.5. Number of not scheduled activities completed for the reporting period 5.6. Project Dashboard 5.7. Executive Summary 5.8. Portfolio Analysis and reporting 5.9. Portfolio dashboard and executive summary. 6.0. WBS (Work Breakdown Schedule) analysis and reporting Menu Earned Value Management Manageme nt System (EVMS) Implementation: Implement Earned Value Management System, can create graphs and reports for the following: 6.1. S-Curves 6.2. Earned Value 6.3. Cost Performance Index (CPI) 6.4. Schedule Performance Index (SPI)
Figure 6: Scheduling to analyze project float path Master Schedule The master schedule shows all the activities in your project. The CPM (Critical Path Method) activity bars, progress bars, and activity bars with floats clearly show you the
Question 2- Pg 8
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 7: Sample Master Schedule.
Target/Baseline Schedule The Target/baseline Schedule helps each stakeholder and team member quickly see where they are now, compared to where they should be. Multiple targets/baselines can be established throughout the project lifetime. When compared with the primary target/baseline, you can determine true health of the project; the achievements, the failures, and the problems. This provides legitimacy to change order requests, extra payment requests, etc. Pert Schedule The Pert view helps you quickly evaluate, track, and adjust your network logic. It's a great tool to have a bird-eye-view of your logic. Gantt/Bar Charts The Gantt/Bar chart view also helps you evaluate, track, and adjust your network logic. It's another tool for improving project quality. Resource Loading Reports These reports provide information concerning proper allocation and utilization of project resources. Are you 'redlined?' You can determine if you have the necessary
Question 2- Pg 9
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
resources to complete the project on time. We suggest three minimum project baselines to control the project schedule, resources, and its scope. Costs Loading Reports Observe total cost of the project or easily determine the total cost incurred at any given point in time. Also provides you information on difference between planned and actual cost. Cash Flow Analysis Cash flow analysis report helps you determine future projections of your project cash flow. This report is critical for securing adequate amount of funding to properly execute the project. Variance Schedule Variance Report Monitor your schedule performance by observing any noticeable differences between what you planned and where you stand today. Budget Variance Report Keep track of your budget performance by viewing significant differences between what you planned and what you actually spent. Status Report Can be used to compile weekly and monthly status report. The report tracks items, such as, meetings minutes, problems discussed, solutions proposed, and other general information for the stakeholders and project team members. Change Management Using project management software, it can help you to manage changes in your project when they occur. We can also help you determine how these changes affect the schedule and its cost. With this information in hand, you can answer the question, 'Do we need extra time and funding to complete the work?' Conflict Resolution It can help you analyze the project problems and conflicts. If necessary, we assist you and your legal team by reconstructing important schedule and cost information to build your case. With the historical information in hand, we can build a project schedule even after significant progress on the project has occurred. We can then
Question 2- Pg 10
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
analyze the schedule variance and other information like project cost, cost variance, and earned value. Coding of Accounts Using a coding feature, it can help you predict if more time or funding is required for your project; even help you determine which activities need a special attention. Monthly Updates Can perform monthly update of actual work completed base from the information directly gathered from the department manager, engineers, PM, or from interim payment certificates. Project wizard, adding activity wizard, import and export wizard, report wizard and project link (MS Project). It has also offers users the web-based project functionality to be ensuring that the web project management gives the project team anywhere, anytime access to the projects they are assigned to work on. Import/export Data
Figure 8: Import key to Other Various Software Format.
Question 2- Pg 11
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Answer 2 (b). Most large corporations or large projects require project risk analysis to verify feasibility of the project and whether the project is time or resource sensitive. Risk analysis helps to identify problem areas and help to formulate a mitigation plan. Risk Management Softwares shall help in identifying risk factors and handling those risk factors. Risk should be established early in a software project and continuously addressed throughout the system lifecycle. A Project Risk is a potential problem that would be detrimental to a project’s success therefore it is crucial to identify and respond to the potential problems with sufficient lead time to avoid a crisis. The first step in Risk Management is identification of project risk factors, as risk cannot be analyzed or handled until they are identified and described in an understandable way. Risk Identification is an organized, through approach to seeking out the real risks associated with a program. Tracking risk enables companies or project for better assess uncertainties. Project management software aids them in identification, definition, estimation and analyses of those uncertainties, which improves their competitive position. Most project management software e.g. Primavera can also be used to identify, quantify risks, plan, monitor and manage project risk. risk. Identify high risk task Identify high risk task is about examine those tasks that are most likely to take longer than expected, end beyond their finish dates, delay the start or finish of other tasks, or cause the project schedule to drag. This shall be able to be reviewed through the task of list, scheduling and CPM. Identify the high risk task are including shows the task with start and end date, estimated durations, task with long durations, shows the critical path, shows the task with external dependencies, review the task constraints and check the task that are behind schedule. The estimated durations shall allow Primavera to see the tasks that has information pending. Tasks with uncertain lengths contribute to uncertainty in determining the project end date. An estimated duration is a current best guess at how long users believe a task will take to complete.
Question 2- Pg 12
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 9: Critical Path. There is a function in Primavera that allows the project team to monitor/track the work progress versus planned. The purpose is to meet a specific finish date and to keep eye on the critical path towards success. This shall help the project team to monitor or trigger the problem shall any of the task are dragged or they can adjust the completion of non critical task not to finished beyond the critical task. Tasks with long duration will allow us to see the tasks for which schedule or cost increases may have a significant impact on the project end date or total cost and able to see the tasks that represent greater risk to the project finish date and cost. This process shall allow us to check for tasks that are behind schedule is to see those tasks for which the actual progress lags behind the planned progress, which may cause the project end date to slip. By set a baseline for the project, we can see how tasks progress over time and see whether their start and finish dates are slipping. Shall this happen the project team can carry out the “catch up” plan e.g. to increase man power or lengthen the working time to catch up with the completion time. Identify the budget risk Identify the budget risk is the process to view and handle those tasks that are over budget, likely to become over budget, or likely to cause the entire project to go over budget. Using project management software e.g. Primavera , tie it budget with the project plan. By doing this we can monitor the actual cost versus plan, find out shall the cost are over budget, view cost variances and analyse the project cost.
Question 2- Pg 13
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
To review the cost can be done in many ways either to check the overall status of project costs at every task, resource, assignment, or for each project or monthly cost. Increases on cost may put the overall project budget at risk.
Figure 10: Simplifies Tracking Resources and Costs. By applying a cost over budget filter, we can quickly trigger on cost overruns for each tasks, assignments or monthly m onthly budget. bud get. We W e can also, view the cost variances vari ances to compare the baseline costs for tasks, resources, or assignments with actual costs.
Figure 11: 11 : Once your projects are underway, Primavera enables you to store actual quantity and cost data per update period so you can compare historical information to the current period using resource profiles and reports. Question 2- Pg 14
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Identify the resource risk and defined risk Identify risk resources is the process to identify whether a project may be at risk shall they are using highly specialized resources that are/only available through limited suppliers, if the resources are not being used efficiently, or if they are working on multiple projects. In some risk management software they allows to identify specialized skills to see which resources have skills that might be difficult to replace, identify materials which can delay the project if the supplier is unable to deliver on time, check for over allocated or under allocated resources to review each resource's total amount of work to ensure that neither too much nor too little work has been assigned and identify resource allocation allocat ion problems across multiple mu ltiple projects to see which resources resour ces are working at or over their maximum maximu m availability. Resource Re source sheet shall give a better overview of resource allocated will and also to avoid doing mistakes. Define risks is the process after we identify the potential risks, project management software e.g. Primavera can easily analyse the impact of risks if they occur.
Quantify risk – using PERT Project management software e.g. Primavera can be use to analyse risks using quantitative method by quantifying effects of risk events on the project such as determining probability of achieving cost and time objectives, calculating contingency reserves, identifying trends in quantitative analysis and ranking risks by estimated cost. implements qualitative risk analysis methodology, quantitative risk analysis that gives the project manager chances to see how project schedule get affected if certain risks occur. This shall help project managers to mitigate risk factors and manage their projects better.
Primavera
Quantitative Risk Analysis technique can be implemented by using PERT (Program Evaluation and Review Technique). PERT chart is the best way to break-down a project structure and chart the various steps needed to complete a project and predict the earliest possible completion date. Work breakdown structure can be used to break the affected activities. PERT can perform to analyze the estimation of duration task by taking into account the expected task duration is calculated as the weighted average of the most optimistic, the most pessimistic, and the most likely time estimates. PERT Chart
Question 2- Pg 15
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
contains a complete Critical Path Scheduling that calculates critical and non-critical tasks. Using PERT chart we identify which tasks gave critical impact on the schedule. Primavera has
views that help users to enter data for PERT analysis: separate views for optimistic, expected, and pessimistic duration, as well as a PERT entry sheet. The most powerful view is the last one as it allows the user to enter and see all durations together.
To assign the probability for each risk, determine how likely risk it is to occur, Primavera PERT analysis tools to see how likely able to hit the dates. If the tasks durations in the project plan are differ significantly from those in the PERT analysis, then the tasks are at higher risk.
Figure 12: Display the PERT chart grouped by summary tasks
PERT chart schedules tasks based on the information you enter such as the duration, dependencies and constraints. Use the calendar to define workdays, non workdays and work hours per day. PERT chart automatically calculates the critical path so that we can see which tasks have the most impact on project schedule. Question 2- Pg 16
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Quantify Risk- Monte Carlo Simulations Monte Carlo simulations can be used as an alternative to overcome the challenges, associated with the PERT method. It is a mathematical method used on risk analysis in many areas and is used to approximate the distribution of potential results based on probabilistic inputs. Each simulation is generated by randomly pulling a sample value for each input variable from its defined probability distribution, e.g. uniform, normal, lognormal, triangular, beta and others. These input sample values are then used to calculate the results such as total project duration, total project cost and project finish time. Monte Carlo simulations have been proven to be an effective methodology for the analysis of project schedule with uncertainties; calculate the critical path and slack values. It’s allowing user to see all the possible outcomes of the decisions and assess the impact of risk, allowing for better decision. Monte Carlo computerized mathematical simulation is a technique that allows people to calculate risk in quantitative analysis and in making a decision. It’s verified project logic and design. Identify common scheduling pitfalls that may result in misleading schedule or risk analysis results. To verify whether the plan is practical based on identified risk events, to pin point likelihood of finishing project ontime and on-budget, to identify key risk drivers based on criticality, risk sensitivity and/or duration sensitivity, to reformulate project logic / sequencing based on risk analysis results, to identify minimum, most likely, and maximum task durations based on three point estimate. It’s model both qualitatively and quantitatively positive and negative risk events (threats and opportunities). Can design a mitigation plan for possible risk events and give report on project likelihood of completing on-time and on-budget based on both pre-mitigated and post-mitigated schedule.
Question 2- Pg 17
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 13: Risk Histogram - Sample Monte Carlo Simulation Results.
Plan for risk When risks are identified and quantified, the next process is to plan for risk. Risk planning can take a lot of time and effort therefore users might only plan for the highpriority risks or the medium- to high-priority risks. Planning involves identifying triggers for each risk and also identifying proactive, contingency, or mitigation plans for each one of them. Start with developing a list of risk events and mitigation strategies to monitor throughout execution of the project. To help interested parties correct expectations regarding project deliverables. Determine confidence levels regarding project cost and schedule success. Determine confidence levels, P-schedules and quick determination of contingency. Identify key risk drivers. Find out what task or risk event is causing your schedule to not perform as expected. Determine the combined probability of achieving both given budgets and completion dates together. “what if…” analysis by interactively varying cost and schedule thresholds to reveal the resultant chance of success. Compare scenarios and determine the cost/benefit ratio of selected mitigation plans.
Question 2- Pg 18
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 14: Sampling of @Risk Result – Tornado chart able to identify the Risk.
Monitor and Manage Risks Once the risk management plan is in place, the next task is to ensure the project team to follow them. To take any actions necessary according to the proactive, mitigation and contingency plans towards successful of project. As conclusion, project management software enable project risk management by identify the risk, quantify risk, plan for risk efficiently then monitor and manage the risk. The best project-management tool may not come in single software, it depends primarily on our needs. Did we need a tool that will allow our internal team detailed control over tasks and workflow, or something that will allow external stakeholders to easily get in and know what's going on? Risk Management Software can help users to make decisions on risk management by showing the most critical risks and how they would occur. By using techniques such as Monte Carlo analysis, we can also determine the likely cost of each particular risk. The most important is how to deal with them.
Question 2- Pg 19
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103 Question 3
Your company has asked you to determine the financial risks of manufacturing 6,000 units of a product rather than purchasing them from a vendor at $66.50 per unit. The production line will handle exactly 6,000 units and requires a one-time setup cost of $50,000. The production cost is $60/unit. Your manufacturing personnel inform you that some of the units manufatured by them may be defective, as shown below: % defective Probability of occurrence
0 0.40
1 0.30
2 0.20
3 0.06
4 0.04
On the other hand, the vendor has the following quality assurance: % defective Probability of occurrence
0 0.90
1 0.085
2 0.015
Defective items must be removed and replaced at a cost of $145/defective unit. Construct a payoff table, and using the expected-value model, determine the financial risk and whether the make or buy option is best. [14 marks]
Question 3 – Pg 1
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103 Answer 3:
The cost of replacing the expected number defectiveness (assuming that this process does not produce further defects) is; % Defective Probability of occurrence (%) Expected Cost (%)
0 40 0
1 30 0.30
2 20 0.40
3 6 0.18
4 4 0.16
Giving1.04 per 100 units per RM1 of replacement cost. Hence, the total cost is 1.04 x 6000/100 x 145 = 9,048.00 If the items are purchased from the vendor, the cost of replacing the expected number of defectives is; % Defective Probability of occurrence (%) Expected Cost (%)
0 0.90 0
1 0.085 0.085
2 0.015 0.030
Giving 0.115 per 100 units per RM1 of replacement cost. Hence, the total cost is 0.115 x 6000/100 x 145 = 1,000.50 The payoff table shall be; Option Setup cost Purchase/Production cost Buy Nil 399,000.00 Make 50,000.00 360,000.00
Defect Cost 9,048.00 1,000.50
Total Cost 408,048.00 411,000.50
It is clear that the buy option is more economical.
Question 3 – Pg 2
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Question 4 Describe the salient aspects of project risk management processes adopted in the PMBOK of the PMI. [14 marks]
Answer 4 The salient aspects of project risk management processes adopted from the PMBOK of the PMI are inclusive of risk management planning , identification, analysis , response the probability and impact of positive events , and decrease the probability and impact of negative events in the project. These processes interact with each other and with the processes in the other Knowledge Areas. Each process can involve effort from one or more persons based on the needs of the project. Each process occurs at least once in every project and occurs in one or more phases, if the project is divided into phases. Project risk is always in the future. Risk is an uncertain event or condition that if it occurs, has an effect on at least one project objective. Objectives can include scope, schedule, cost, and quality. A cause may be a requirement, assumption, constraint, or condition that creates the possibility of negative outcomes. For example, causes could include the requirement of an environmental permit to do work, or having limited personnel assigned to design the project. The risk event is that the permitting agency may take longer than planned to issue a permit, or in the case of an opportunity, limited design personnel available and assigned may still be able to get the job done on time, thereby accomplishing work with less resource utilization. If either of these uncertain events occurs, there may be an impact on the project costs, schedule, or performance. Risk conditions could include aspects of the project’s or organization’s environment that may contribute to project risk, such as immature project management practices, lack of integrated management systems, concurrent multiple projects, or dependency on external participants who cannot be controlled. Project risk has its origins in the uncertainty present in all projects. Known risks are those that have identified and analyzed, making it possible to plan responses for those risks. Specific unknown risks cannot be managed proactively, which suggests that the project team should create a contingency plan. A project risk that has occurred can also be considered an issue.
Question 4 – Pg 1
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 1: Project Risk Management Overview - Summary of the PMBOK six Project Risk Management Processes
The following are six major Project Risk Management processes as spell out in the PMBOK; 1) Plan Risk Management – The process of defining how to conduct risk management activities for a project. Careful and explicit planning enhances the possibility of success of the five other risk management processes. Risk Management Planning is the process of deciding how to approach and conduct the risk management activities for a project and the planning of risk management processes is important to ensure that the level, type, and visibility of risk management are commensurate with both the risk and importance of the project to the organization, to provide sufficient resources and time for risk management activities, and to establish an agreed-upon basis for evaluating risks. Question 4 – Pg 2
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
The Risk Management Planning process should be completed early during project planning, since it is crucial to successfully performing the other five risk management salient processes. The result of Risk Management Planning is actually a Risk Management Plan. The risk management plan identifies and establishes the activities of risk management for the project in the project plan.
Figure 2: Plan Risk Management; Inputs, Tools & Techniques and Outputs.
2) Identify Risks – The process of determining which risks may affect the project documenting their characteristics. Risk identification involves identifying potential risks in a project. Risk Identification produces a deliverable — the project Risk Register – where risks are identified that may affect the project’s ability to achieve its objectives. Risk Identification documents which risks might affect the project and documents their characteristics. The Risk Register is subsequently amended with the results from qualitative risk analysis and risk response planning, and is reviewed and updated throughout the project. Participants in risk identification activities can include the following, where
appropriate; project manager, project team members, risk management team (if assigned), subject matter experts both from the project and from outside the project team, customers, end users, other project managers, stakeholders, and risk management experts. While these personnel are often key participants for risk identification, all project personnel should also be encouraged to identify risks. Risk identification is an iterative process because new risks may become known as the project progresses through its life cycle and previouslyidentified risks may drop out. The frequency of iteration and who participates in each cycle will vary from case to case. The project team should be Question 4 – Pg 3
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
involved in the process so that they can develop and maintain a sense of ownership of, and responsibility for, the risks and associated risk response actions. Stakeholders outside the project team may provide additional objective information. The Risk Identification process is a requirement for the Qualitative Risk Analysis process. The assigned team members identify the potential risks (threats and opportunities), using: •
The risk breakdown structure, suitably tailored to the project.
•
Risk list.
•
Their own knowledge of the project or similar projects.
•
•
•
Consultation with others who have significant knowledge of the project or its environment. Consultation with others who have significant knowledge of similar projects. Other tools and techniques such as those provided in Chapter 11, PMBOK.
It is important to specify the risk correctly e.g. a risk has a cause and, if it occurs, an impact on a project objective. The risk statement structure that should be followed in specifying identified risks is: Because of the (cause, condition that is true), (a risk) may occur, leading to an impact (at this stage unanalyzed) on XX objective where XX is cost, time, scope and or quality. This structure helps to specify the risk correctly. As an example of the use of the risk statement structure, the fact that the bridge is built over water is not a risk, it is a cause. The risk may be unknown sub-surface conditions, which if they occur may lead to re-design of the supports and pilings. Mitigation could involve coring at the support location or soil investigation to determine type of piling to be used and engineering analysis based on the findings, to reduce the probability of unknown conditions. In risk identification, sometimes there is a temptation to dismiss a risk because “we cannot do anything about it anyway”. This argument does not change the risk into a non-risk, simply because there is no viable mitigation strategy. The risk that cannot be mitigated may have an effect on the project and can be calibrated in qualitative and quantitative analysis. It is just not possible to handle this risk, but it is still a risk. Also, some of these risks may be affected by risk handling if people think carefully about it, for instance, Question 4 – Pg 4
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
political risk may be influenced by public outreach and information campaigns. The team considers: •
•
•
Threats — Threats — a risk that will give a negative impact on a project objective if it occurs (what might happen to jeopardize the project’s ability to achieve its objectives). Opportunities — a risk that will give a positive impact on a project objective if it occurs (what might happen to improve the project’s ability to achieve its objectives). Triggers — symptoms and warning signs that indicate whether a risk is becoming a near-certain event and a contingency plan/response plan should be implemented.
The team should also consider: •
•
•
Residual risks - Risks that remain even after developing responses to the project's original risks. Example: You identify delays caused by hazardous waste issues as one of your primary risks. If you are able to develop a response that mitigates only problems caused by underground fuel tanks, you may still have other hazardous waste risks. Our goal is to reduce residual risks to an acceptable level. Secondary risks – Secondary risks are caused by responses to the project's original risks. For example, if you decide to hire outside help as a way of mitigating a project risk, you now have additional concerns that arise as a result of using the external vendor. The timeliness of their work and potential contractual disputes are risks you did not have before you decided to use their services. Risk interaction - The combined effect of two or more risks occurring simultaneously is greater than the sum of the individual effects of each free standing risk. For instance, Federal budget cuts may increase delays in Federal Highway Administration permits at the same time federal programming dollars become scarcer.
Question 4 – Pg 5
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Figure 3: Identify Risk; Inputs, Tools & Techniques and Outputs.
3) Perform Qualitative Risk Analysis – Includes methods for prioritizing the identified risks for further action, such as Quantitative Risk Analysis or Risk Response Planning. Organizations can improve the project’s performance effectively by focusing on high-priority risks. Qualitative Risk Analysis assesses the priority of identified risks using their
probability of occurring, the corresponding impact on project objectives if the risks do occur, as well as other factors such as the time frame and risk tolerance of the project constraints of cost, schedule, scope, quality, safety and sustainability. Sometimes experts or functional units assess the risks in their respective fields and share these assessments with the team within the company. Across the same project the definitions that will be used for levels of probability and impact should be the same. The organization’s management, project customer or sponsor has an important role in the Qualitative Risk Analysis process. •
•
The project sponsor defines for the risk analysis lead and team the levels of impact on time, cost, scope and quality that would qualify a risk as having a very low, low, moderate, high or very high impact on each objective. The project sponsor determines the combinations of probability and impact that make a risk low, moderate and high priority for each objective in light of the definitions just mentioned.
Once the definitions are in place, team members assess the identified risks’ probability and impact and then put them into high, moderate, and low risk Question 4 – Pg 6
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
categories for each project objective (time, cost, scope, quality). They rank risks by degrees of probability and impact, using the definitions in place, and include their assessment rationale. This is called “Risk Ranking”. Team members revisit qualitative risk analysis during the project’s lifecycle. When the team repeats qualitative analysis for individual risks, trends may emerge in the results. These trends can indicate the need for more or less risk management action on particular risks, or whether a risk mitigation plan is working.
Figure 4: Perform Qualitative Risk Analysis; Analysis; Inputs, Tools & Techniques and Outputs.
4) Perform Quantitative Risk Analysis – Is a way of numerically estimating the probability that a project will meet its cost and time objectives. Quantitative analysis is based on a simultaneous evaluation of the impact of all identified and quantified risks. The result is a probability distribution of the project’s cost and completion date based on the identified risks in the project. Quantitative risk analysis involves statistical techniques, primarily Monte Carlo simulation, that are most widely and easily used with specialised software. Quantitative risk analysis starts with the model of the project, either its project schedule or its cost estimate depending on the objective. The degree of uncertainty in each schedule activity and each line-item cost element is represented by a probability distribution. The probability distribution is usually specified by determining the optimistic, the most likely and the pessimistic values for the activity or cost element – this is typically called the “3-point estimate.” The three points are estimated during an interview with subject matter experts who usually focus on the schedule or cost elements one at a time. The risks that lead to the three points are recorded for the quantitative risk analysis report and for risk response planning. For each activity or cost element a probability distribution
Question 4 – Pg 7
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
type is chosen that best represents the risks discussed in the interview. Typical distributions usually include the triangular, beta, normal and uniform. A specialized Monte Carlo simulation software program runs (iterates) the project schedule or cost estimate many times, drawing duration or cost values for each iteration at random from the probability distribution derived from the 3-point estimates and probability distribution types selected for each element. The Monte Carlo software develops from the results of the simulation a probability distribution of possible completion dates and project costs. From this distribution it is possible to answer such questions as: • •
•
How likely is the current plan to come in on schedule or on budget? How much contingency reserve of time or money is needed to provide the agency with a sufficient degree of certainty? Using sensitivity analysis, which activities or line-item cost elements contribute the most to the possibility of overrunning schedule or cost targets?
The Department does not require quantitative analysis for projects; however, the PDT or the District may determine that a project will need to undergo an in-depth quantitative risk analysis based on the cost, complexity or high profile of the project.
Figure 5: Perform Quantitative Risk Analysis; Analysis; Inputs, Tools & Techniques and Outputs.
5) Plan Risk Responses – The process of developing options and actions to enhance opportunities and to reduce threats to project objectives. Risk Response Planning is the process of developing options, and determining actions to enhance opportunities and reduce threats to the project’s objectives. It focuses on the high-risk items evaluated in the Question 4 – Pg 8
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
qualitative and/or quantitative risk analysis. In Risk Response Planning parties are identified and assigned to take responsibility for each risk response. This process ensures that each risk requiring a response has an owner monitoring the responses, although a different party may be responsible for implementing the risk handling action itself. The project manager and the PDT identify which strategy is best for each risk, and then design specific action(s) to implement that strategy. Strategies for Negative Risks or Threats include: Avoid. Avoid. Risk avoidance involves changing the project plan to eliminate the risk or to protect the project objectives (time, cost, scope, quality) from its impact. The team might achieve this by changing scope, adding time, or adding resources (thus relaxing the so-called “triple constraint”). These changes may require a Programming Change Request (PCR). Some negative risks (threats) that arise early in the project can be avoided by clarifying requirements, obtaining information, improving communication, or acquiring expertise. Transfer. Transfer. Risk transference requires shifting the negative impact of a threat, along with ownership of the response, to a third party. An example would be the team transfers the financial impact of risk by contracting out some aspect of the work. Transference reduces the risk only if the contractor is more capable of taking steps to reduce the risk and does so. Risk transference nearly always involves payment of a risk premium to the party taking on the risk. Transference tools can be quite diverse and include, but are not limited to the use of: insurance, performance bonds, warranties, guarantees, incentive/disincentive clauses, A+B Contracts, etc. Mitigate. Mitigate. Risk mitigation implies a reduction in the probability and/or impact of an adverse risk event to an acceptable threshold. Taking early action to reduce the probability and/or impact of a risk is often more effective than trying to repair the damage after the risk has occurred. Risk mitigation may take resources or time and hence may represent a tradeoff of one objective for another. However, it may still be preferable to going forward with an unmitigated risk. Monitoring the deliverables closely, increasing the number of parallel activities in the schedule, early involvement of regulatory agencies in the Question 4 – Pg 9
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
project, early and continuous outreach to communities/advocacy groups, implementing value engineering, performing corridor studies, adopting less complex processes, conducting more tests, or choosing a more stable supplier are examples of mitigation actions. Strategies for Positive Risks or Opportunities include: Exploit. The organization wishes to ensure that the opportunity is realized. This strategy seeks to eliminate the uncertainty associated with a particular upside risk by making the opportunity definitely happen. Examples include securing talented resources that may become available for the project. Share. Allocating ownership to a third party who is best able to capture the opportunity for the benefit of the project. Examples include: forming risksharing partnerships, teams, working with elected officials, special-purpose companies, joint ventures, etc. Enhance. This strategy modifies the size of an opportunity by increasing probability and/or positive impacts, and by identifying and maximizing key drivers of these positive-impact risks. Seeking to facilitate or strengthen the cause of the opportunity, and proactively targeting and reinforcing its trigger conditions, might increase probability. Impact drivers can also be targeted, seeking to increase the project’s susceptibility to the opportunity.
Strategy for both Threats and Opportunities: Acceptance. Acceptance. A strategy that is adopted because it is either not possible to eliminate that risk from a project or the cost in time or money of the response is not warranted by the importance of the risk. When the project manager and the project team decide to accept a certain risk(s), they do not need to change the project plan to deal with that certain risk, or identify any response strategy other than agreeing to address the risk if and when it occurs. A workaround plan may be developed for that eventuality. There are two types of acceptance strategy: a) Active acceptance. The most common active acceptance strategy is to establish a contingency reserve, including amounts of time, money, or resources to handle the threat or opportunity.
Question 4 – Pg 10
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
i. Contingency Plan : Some responses are designed for use only if certain events occur. In this case, a response plan, also known as “Contingency Plan”, is developed by the project team that will only be executed under certain predefined conditions commonly called “triggers.” b) Passive acceptance. Requires no action leaving the project team to deal with the threats or opportunities as they occur. i. Workaround : Workaround is distinguished from contingency plan in that a workaround is a recovery plan that is implemented if the event occurs, whereas a contingency plan is to be implemented if a trigger event indicates that the risk is very likely to occur. As with risk identification process, the team should also consider residual risks, secondary risks, and risk interaction in the risk response planning process.
Figure 6: Plan Risk Responses; Responses; Inputs, Tools & Techniques and Outputs.
6) Monitor and Control Risks – The process of implementing risk response plans, tracking identified risks, monitoring residual risks, identifying new risks, and evaluating risk process effectiveness throughout the project. Risk monitoring and control keeps track of the identified risks, residual risks, and new risks. It also monitors the execution of planned strategies on the identified risks and evaluates their effectiveness. Risk monitoring and control continues for the life of the project. The list of project risks changes as the project matures, new risks develop, or anticipated risks disappear.
Question 4 – Pg 11
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Typically during project execution there should be regularly held risk meetings during which all or a part of the Risk Register is reviewed for the effectiveness of their handling and new risks are discussed and assigned owners. Periodic project risk reviews repeat the process of identification, analysis, and response planning. The project manager ensures that project risk is an agenda item at all PDT meetings. Risk ratings and prioritization commonly change during the project lifecycle. If an unanticipated risk emerges, or a risk’s impact is greater than expected, the planned response may not be adequate. The project manager and the PDT must perform additional response planning to control the risk. Risk control involves: Choosing alternative response strategies Implementing a contingency plan Taking corrective actions Re-planning the project, as applicable The individual or a group assigned to each risk (risk owner) reports periodically to the project manager and the risk team leader on the status of the risk and the effectiveness of the response plan. The risk owner also reports on any unanticipated effects, and any mid-course correction that the PDT must consider in order to mitigate the risk.
Figure 7: Monitor and Control Risks; Risks; Inputs, Tools & Techniques and Outputs.
Question 4 – Pg 12
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Question 5
a. Discuss the appropriateness, or otherwise, of the following following risk measures: i) Likelihood of Loss times Impact of Loss ii) The Expected Monetary Value b.
Identify the the various risk exposures in a large project that can be effectively managed using insurance.
c. You have $1,000,000 worth of equipment at the job site and wish wish to minimise your risk of direct property damage by taking out an insurance policy. The insurance company provides you with their statistical data as shown below: Property Damage Type Total Medium Low No damage
Probability (%) 0.02 0.08 0.10 99.8
Loss Amount in $ 1,000,000 400,000 200,000 0
Assuming that the insurance company adds on $300 for handling and profit and usesexpected value to calculate premiums, calculate: i) the exected loss and its variance; ii) the premium the insurer is likely to charge for: - full cover against any loss - cover against losses in excess of $200,000 [14 marks] [TOTAL: 70 MARKS]
Question 5 – Pg 1
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Answer 5: a. i) Likelihood of Loss times Impact of Loss
Likelihood means the chance that a particular risk will occur. It can be expressed as either a probability for a single event or condition, or a frequency of occurrence for repeat events. Mean while "risk" or the loss or treat refers to an uncertain adverse event or condition that if it occurs will result in unfavourable outcomes such as injury, damage to the environment, delay, or economic loss. Probability/likelihood of occurrence is the likelihood of the event to occur and in Risk Management, it is to determine the probability/likelihood of a risk event occurring and it treat where is in this case time loss is the consequence/impact.
Defining likelihood and consequence
Standard methods exist for defining likelihood and consequence scales which apply to mostRio Tinto risk analyses. The person pe rson leading the risk analysis must either: • confirm applicability of the standard method for the particular application before commencing the risk analysis, or • define and justify alternative scales to be used for a particular analysis. Typically both likelihood and consequence scales are defined with three, four or five points, usually using the same number of points for likelihood and for consequence (eg 3x3, 4x4 or 5x5). Four point scales are appropriate for most Rio Tinto risk analyses, since three point scales may not be sufficiently rigorous to allow adequate discrimination between different classes of risks, and five point scales may be overly complex. However 4x4 scales are not mandatory. However many scale points are selected for a particular risk analysis, it is essential that their meanings are defined prior to commencing the analysis. An example four point scale for likelihood is presented in the table below, defining probability values for single risk events, and time based frequency values for repeated events. Other types of likelihood definitions may also be required (see the Risk portal for details). In some circumstances it may be appropriate to define likelihood as a combination of probability and exposure.
Question 5 – Pg 2
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Example definitions of likelihood
Example definition scales for the main types of economic consequences are presented in the Risk portal, against which each identified risk can be assessed. Since risk analyses must address both threats and opportunities, it is necessary to define both downside and upside economic consequence scales. Threats have unfavourable economic consequences (increased capital expenditure or operating cost, delayed schedule or production, delayed or lost revenue); opportunities have favourable economic consequences. Economic consequences are scaled to support risk analyses at different levels in the organisation, since risk acceptance thresholds for smaller projects or business units have lower absolute values than the thresholds for larger projects or business units. Example definition scales for non economic consequences are also presented on the Risk portal, against which identified risks can be assessed. Definition of upper limits for unfavourable non economic consequences does not imply that they are acceptable to Rio Tinto, or Rio Tinto Risk analysis and management guidance 5 that a consequence at this level would be tolerated under any circumstances. It merely recognises that such levels of consequence are theoretically possible as upper limits. Risk acceptance thresholds
Clear and well defined risk acceptance thresholds are required in order to define the level of risk that can be tolerated. Risk acceptance thresholds are based on defined scales for likelihood and consequences. Risks are then assessed and classified using a risk determination matrix, using the same matrix for both threats and opportunities. An example 4x4 matrix is given here, where both likelihood and consequence are assessed against four point scales, and the risk acceptance threshold is shown in this diagram as the white zone (occupied by class II risks). Question 5 – Pg 3
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
The example matrix has asymmetric zones which give more weight to consequence than to likelihood. The precise placement of zone boundaries reflects the risk acceptance threshold. Where a risk has more than one type of consequence, its position in the matrix is determined by its highest scoring consequence.The positi on of each risk in the matrix determines its classification into one of classes I, II, III or IV, as illustrated in the sample matrix. These classes indicate where the risk is positioned in relation to the risk acceptance threshold (see above). Example risk determination matrix
High consequence low likelihood risks
Special attention needs to be paid to any risks assessed as having very high negative consequence and very low likelihood. These may include risks where consequences include multiple fatalities, a massive environmental incident, or a major plant or mine failure resulting in severe interruption to business. They may also include aggregation risks arising from a number of related risks. Where such risks are identified, they should be noted in the Risk register as special cases, and treated separately from the standard risk analysis process, with further urgent evaluation. Question 5 – Pg 4
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Answer 5: a. ii) The Expected Monetary Value
Business or project decisions vary with situations, which in-turn are fraught with threats and opportunities. Calculating the Expected Monetary Value of each possible decision path is a way to quantify each decision in monetary terms. Calculating Expected Monetary Value by using Decision Trees is a recommended Tool and Technique for Quantitative Risk Analysis. The following is Decision Trees example that'll illustrate the use of Decision Tree Analysis in Project Risk Management.
Steps to Use Decision Trees Analysis
To use Decision Tree Analysis in Project Risk Management, Management, you need to: 1. 2. 3. 4.
Document a decision in a decision tree. Assign a probability of occurrence for the risk pertaining to to that decision. Assign monetary value of the impact of the risk risk when it occurs. Compute the Expected Monetary Value for each decision path. path.
The simplest way to understand decision trees is by looking at a Decision Trees example in Project Risk Management.
Decision Trees Example - Scenario
Suppose your organization is using a legacy software. Some influential stakeholders believe that by upgrading this software your organization can save millions, while others feel that staying with the legacy software is the safest option, even though it is not meeting the current company needs. The stakeholders supporting the upgrade of the software are further split into two factions: those that support buying the new software and those that support building the new software in-house. Confusion reigns in the meeting room with stakeholders pointing out negative risks for each option!!! By exploring all possibilities and consequences, you can quantify the decisions and convince stakeholders. This is known as Decision Tree Analysis. The following Decision Trees example uses Decision Tree Analysis to help make an informed Project Risk Management decision. The computations involve calculating the Expected Monetary Value. Read on to learn more about Decision Trees and Decision Tree Analysis. Question 5 – Pg 5
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Decision Trees Example - Building the Decision Tree to Use in Decision Tree Analysis
In this scenario, you can either: •
•
•
Build the new software : To build the new software, the associated cost is $500,000. Buy the new software : To buy the new software, the associated cost is $750,000. Stay with the legacy software : If the company decides to stay with the legacy software, the associated cost is mainly maintenance and will amount to $100,000.
Looking at the options listed above, you can start building the decision trees as shown in the diagram. By looking at this information, the lobby for staying with the legacy software would have the strongest case. But, let’s see how it pans out. Read on. The Buy the New Software and Build the New Software options will lead to either a successful deployment or an unsuccessful one. If the deployment is successful then the impact is zero, because the risk will not have materialized. However, if the deployment is unsuccessful, then the risk will materialize and the impact is $2 million. The Stay with the Legacy Software option will lead to only one impact, which is $2 million, because the legacy software is not currently meeting the needs of the
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Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
company. Nor, will it meet the needs should there be growth. In this example, we have assumed that the company will have growth. In this example, Decision Trees analysis will be used to make the project risk management decision. The next step is to compute the Expected Monetary Value for each path in the Decision Trees. Let's see how this helps in this Decision Trees example.
Decision Trees Example - Calculating Expected Monetary Value for each Decision Tree Path
The diagram depicts the decision tree. Now, you can calculate the Expected Monetary Value for each decision. The Expected Monetary Value associated with each risk is calculated by multiplying the probability of the risk with the impact. By doing this, we get the following:
• • •
Build the new software : $ 2,000,000 * 0.4 = $ 800,000 Buy the new software: $ 2,000,000 * 0.05 = $ 100,000 Staying with the legacy software : $ 2,000,000 * 1 = $ 2,000,000
Now, add the setup costs to each Expected Monetary Value:
Question 5 – Pg 7
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103 • • •
Build the new software : $ 500,000 + $ 800,000 = $ 1,300,000 Buy the new software: $ 750,000 + $ 100,000 = $ 850,000 Staying with the legacy software : $ 100,000 + $ 2,000,000 = $ 2,100,000
View the image above, to see how all the figures above look like in a Decision Tree after conducting a Decision Tree Analysis. Now let's make the decision in this Decision Trees example. This will illustrate the role of Decision Trees in Project Risk Management.
Decision Trees Example - Making the Decision
Looking at the Expected Monetary Values computed in this Decision Trees example, you can see that buying the new software is actually the most cost efficient option, even though its initial setup cost is the highest. Staying with the legacy software is by far the most expensive option. When you conduct a SWOT Analysis to determine whether a business idea is worth pursuing, there is no quantified data to support your decision. Decision Trees and Decision tree analysis help you quantify the data, which is then useful in convincing stakeholders. It is a critical part in Project Risk Management.
Question 5 – Pg 8
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Answer 5: b) Identify the various risk exposures in a large project that can be effectively managed using insurance.
A successful large construction project is the result of meticulous planning, the use of sophisticated machinery and tools and the coming together of several skilled workers. With so many factors at play, the site is also often fertile ground for mishaps that can be quite expensive if the contractor is not insured. So, here is a look at the various issues that a construction company may be faced with if they do not have the proper insurance for construction project and the different policies that can help a company to mitigate the various risks associated with construction projects.
1. Contractor All Risk (CAR):
Risk involved in the businesses face that are inherent in construction projects, from project inception through completion and beyond which is physical lost or damage to the properties. Normally insurance will cover 2 types: i.
Construction all risk (CAR) which covers all types of construction risks, lost of raw material and includes works brought on-site as part of contracts as well as temporary works erected or constructed on-site.
ii.
Equipment and machinery all risk which covers plant and machinery construction risks and can be extended to include third-party liability related to work conducted on contract site.
Most insurance providers have established that contractors are susceptible to the risk of material damage and there are several policies in the market to mitigate the losses that may result from such an occurrence. The coverage may not only include the material used in the construction project but also cover the machinery used to complete the job. The policies that protect a contractor from such a risk include the contractor plant and machinery coverage and also the all risk policy. A contractor who is not insured against material and machinery damage may have to incur heavy losses in case of situations that destroy the material and the tools and machinery used on the construction site.
Question 5 – Pg 9
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
2. Erection All Risk;
Policies such as Civil engineering completed risk insurance and Erection All risk policies will protect a construction company against damages resulting from factors such as floods, fire, earthquakes, hurricane, strikes, civil unrest, riots, theft and vandalism etc. This type of insurance for construction project offers more comprehensive coverage and is highly recommended for projects that entail large investments form the construction company.
3. Risk to 3 rd party either properties or body illness:
Normally this can be covered under the CAR policy but provided it stated in the clauses. It covers the damage to 3rd parties of properties belongings and body illness due to the erection of the project. The contractor may be liable for all third party claims resulting from personal injury as well as property damage. In order to avail coverage for such liabilities a construction company should purchase insurance policies such as the public liability policy, worker’s compensation, and other forms of employer liability policies. third party liability coverage insurance policy. This insures against accidental bodily injury or illness and loss of life to third parties as well as accidental loss of, or damage to property belonging to third parties, caused by an accident at the construction site.
4. Professional Indemnity Insurance;
Professional Indemnity Insurance (PI) is typically obtained by business professionals who provide advice to their customers. In construction works normally shall involves architecture, consulting engineers, quantity surveyor and building professions. It’s provides cover for claims brought against the policyholder due to their professional negligence.
Question 5 – Pg 10
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
There are three types of PI wording as below; i. ii. iii.
Negligent act, negligent error or negligent omission Negligent act, error or omission Civil liability
5. Workmen Compensation;
It is to protect the company from related to worker injury in work place either fatal or not, body illness due to disease. By law, a contractor also required to have employee liability insurance so the safety of all the workers and employees is assured. The contractor will need to provide safety equipment including safe pants, helmets, proper tools and equipment to ensure that the employees are working in conditions which can be considered safe under the terms of such a policy.
6. loss of profits
In some cases, a contractor may be faced with the very real possibility of loss of profits because the project could not be completed by the deadline. For the contractor this would mean loss of all the money that was invested in the labor and machinery and in many cases all the material used for the project. Fortunately, there is a policy that can protect you from such a situation; this type of insurance for construction project is known as advance loss of profits policy and it protects you against the loss of anticipated income/profit from a project.
Question 5 – Pg 11
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Answer 5: (c) Using expected value model:
Handling and profit = RM300.00
i)
The expected loss and its variance;
Property damage type
Probability (%)
Loss amount (RM)
Probability loss amount (RM)
Total
0.0002
1,000,000
200
Medium
0.0008
400,000
320
Low
0.0010
200,000
200
No damage
0.9980
0
0
Thus expected value loss = E(X) = a i Pr(X = ai) = (200 + 320 + 200 + 0)/1 = RM 720.00
Mean
=(1,000,000 + 400,000 + 200,000 + 0)/4 = 400,000
Variance:
Var (X) = E( (X - µ) 2) = 2
= ∑(a i - µ)2 Pr(X = a i)
= (1,000,000-400,000)2 x 0.0002 + (400,000-400,000)2 x 0.0008 + (200,000400,000)2 x 0.001 + (0-400,000)2 x 0.998 = 159,792,000,000 Question 5 – Pg 12
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
ii) the premium the insurer insurer is likely to charge for: - full cover against any loss - cover against losses in excess of $200,000
Likely premium charge: Full cover against any loss: = RM720 + RM300 = RM 1,020.00
Therefore, covering against losses in excess of RM200,000. = (200 + 320) ÷ (0.999) = 520/0.999 = RM 520.52 = 520.52 + RM300 = RM 820.52
Question 5 – Pg 13
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Part B Question 1 a. Describe how you would use the Monte Carlo Simulation Technique for project risk management purposes. b. A construction firm has the following abridged balance sheet: RM ‘000,000 Assets Net fixed assets Cash and Current assets Total assets
70 30
Financed By 7% Debentures Equity capital Current liabilities Total capital
30 60 10
RM ‘000,000
100
100
Its fixed assets are expected to provide a 15% return over the planned investment horizon. This firm intends to embark on projects that require an initial sinking of RM 30million and are expected to provide in aggregate a 20% return with a standard deviation of 30% over the planned investment horizon. These projects are to be financed wholly by the internally available funds and the debentures are to be redeemed at the end of the planned investment horizon.
For this firm, i)
evaluate, stating your assumptions, the probability that the firm is is financially better off by embarking on the intended projects;
ii)
assuming that it is only able to earn actual returns of 12% on its fixed assets and 15% on its projects, derive the projected balance sheet at the end of the planned investment horizon;
Question Part B – Pg 1
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
iii) assuming that the projects' expected returns are normally distributed, represent the provided information in suitable mathematical notations; iv) assuming that the projects' expected returns are normally distributed, derive an expression for the firm’s value at the end of the planned investment horizon; and v) stating your other relevant assumptions, derive the probability of its ruin brought about by embarking on these projects. [TOTAL: 30 MARKS]
Question Part B – Pg 2
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Part B Question 1 a. Describe how you would use the Monte Carlo Simulation Technique for project risk management purposes. Risks can relate to any aspect of a project, it can be the cost, exposure, schedule, man power matters, quality and many more. The key to managing risks in a project is to identify them early and develop an appropriate risk response plan. But before we can develop a Risk Response Plan, the impact of risks on the project needs to be quantified. This process is known as quantitative risk analysis wherein risks are categorized as high or low priority risks depending on the quantum of their impact on the project. The Project Management Body of Knowledge (PMBOK) advocates the use of Monte Carlo analysis for performing quantitative risk analysis. Monte Carlo analysis involves determining the impact of the identified risks by running simulations to identify the range of possible outcomes for a number of scenarios. It is starts with the model of the project, either its project schedule or its cost estimate depending on the objective. The analysis is based on a simultaneous evaluation of the impact of all identified and quantified risks. The result is a probability distribution of the projects cost and completion date based on the identified risks in the project. The degree of uncertainty in each schedule activity and each line-item cost element is represented by a probability distribution. While managing a project, we would have faced numerous situations where we have a list of potential risks for the project, but we might have no clue of their possible impact on the project. A simplistic approach for taking scheduling confidence into account is the PERT (also known as Three Point Estimate) Estimate) technique. This technique uses three estimates to define an approximation of the activity’s duration and cost. This technique works as follows: Determine your Optimistic, Pessimistic and Most Likely estimates for each activity. The three points are estimated during an interview with subject matter experts who usually focus on the schedule or cost elements one at a time. The risks that lead to the three points are recorded for the quantitative risk analysis report and for risk response planning. A random sampling is performed by using uncertain risk variable inputs to generate the range of outcomes with a confidence measure for each outcome. This is typically done by establishing a mathematical model and then running simulations using this model to estimate the impact of project risks. This technique helps in forecasting the likely outcome of an event and thereby helps in making informed project decisions.
Question Part B – Pg 3
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
This is the point where using Monte Carlo Analysis can become so handy. Rather than using the simplistic approach suggested by the PERT technique, the Monte Carlo Analysis technique utilizes the three estimates to repeatedly simulate the project’s completion date, while taking into account the statistical likelihood that each activity’s duration will be somewhere on the continuum between the three estimates. From this distribution it is possible to answer such questions as: How likely is the current plan to come in on schedule or on budget? How much contingency reserve of time or money is needed to provide the agency with a sufficient degree of certainty? Using sensitivity analysis, which activities or line-item cost elements contribute the most to the possibility of overrunning schedule or cost targets? The result of this analysis will not be a definitive answer, i.e. the answer will not be in the form of “based on the individual activity duration estimates, the project is expected to finish of date X”. Rather, the answer will be in the form of “based on the individual activity duration estimates, there is X% chance that the project will be complete on or before date Y”.
How to Use Monte Carlo Analysis in Project Risk Management Whenever we face a complex estimation or forecasting situation that involves a high degree of complexity and uncertainty, it is best advised to use the Monte Carlo simulation to analyze the likelihood of meeting our objectives, given our project risk factors, as determined by our schedule risk profile. It is very effective as it is based on evaluation of data numerically and there is no guesswork involved. The key benefits of using the Monte Carlo analysis are listed below: •
•
•
•
It is an easy method for arriving at the likely outcome for an uncertain event and an associated confidence limit for the outcome. The only pre-requisites are that you should identify the range limits and the correlation with other variables. It is a useful technique for easing decision-making based on numerical data to back your decision. Monte Carlo simulations are typically useful while analyzing cost and schedule. With the help of the Monte Carlo analysis, we can add the cost and schedule risk event to our forecasting model with a greater level of confidence. We can also use the Monte Carlo analysis to find the likelihood of meeting our project milestones and intermediate goals.
Figure 1, below was produced using a Monte Carlo Simulation software, and highlights the type of outputs that such a tool will produce. The overall purpose of this figure is to present the likelihood (or a better term – probability) of the project completing on any particular date. Question Part B – Pg 4
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
The left axis (Hits ( Hits)) can be used to review the number of times, during the simulation, that a particular date was identified as a potential completion date. The right axis (Cumulative Frequency) Frequency) shows the total accumulative times that the project was determined to complete on or before a particular date. Meanwhile the bottom axis ( Distribution) Distribution) shows the identified potential completion dates, while the height of the bar associated with that date is determined by the number of times that the date has been identified by the simulation as being the project’s completion date. In this example, having analysed the project activity durations, the following statements can now be made: •
•
Based on the individual activity duration estimates, there is 80% chance that the project will be complete on or before 21/05/02. Based on the individual activity duration estimates, there is 50% chance that the project will be complete on or before 15/05/02.
Figure 1: Sample Finished Date Probability - Using Monte Carlo simulation. Question Part B – Pg 5
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
The yellow arrow, pointing at 08/05/02, this is the date shown as the project completion date on the project plan. Now that we’ve performed the risk analysis we can determine that our chances of actually finishing the project on or before that date are just 15%!
Conclusion Monte Carlo simulation is a valuable technique to verify the feasibility of a project by analyzing risks specifically those related to cost and schedule. Whether the project is time or resource sensitive, risk analysis helps to identify problem areas and help formulate a mitigation plan. The fact that it is based on numeric data gathered by running multiple simulations adds even greater value to this technique. It also helps in removing any kind of project bias regarding the selection of alternatives while planning for risks. While running the Monte Carlo simulation, it is advisable to seek active participation of the key project decision-makers and stakeholders, specifically while agreeing on the range values of the project risk variables and the probability distribution patterns to be used. This will go a long way in building stakeholder confidence in your overall risk-handling capability for the project. Moreover, this serves as a good opportunity to make them aware of the entire risk management planning being done for the project. Though there are numerous benefits of the Monte Carlo simulation, the reliability of the outputs depends on the accuracy of the range values and the correlation patterns, if any, that you have specified during the simulation. Therefore, you should practice extreme caution while identifying the correlations and specifying the range values. Else, the entire effort will go waste and you will not get accurate results. Monte Carlo probability simulations, can help us to properly carry out the risk analysis and finally to complete the project timely within the estimated budgert and acceptable quality, safety and sustainability. In most large corporations or large projects require project risk analysis to verify feasibility of the project. Whether the project is time or resource sensitive, risk analysis helps to identify problem areas and help formulate a mitigation plan. The following are the reason why we need a risk analysis: i. ii. iii. iv.
To verify project logic and design. Identify common scheduling pitfalls that may result in misleading schedule or risk analysis results. To verify whether the plan is practical based on identified risk events. To pinpoint likelihood of finishing project on-time and on-budget.
Question Part B – Pg 6
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
v. vi. vii. viii. ix. x.
To identify key risk drivers based on criticality, risk sensitivity and/or duration sensitivity. To reformulate project logic / sequencing based on risk analysis results. To identify minimum, most likely, and maximum task durations based on three point estimate. Model both qualitatively and quantitatively positive and negative risk events (threats and opportunities). To design a mitigation plan for possible risk events. To report on project likelihood of completing on-time and on-budget based on both pre-mitigated and post-mitigated schedule.
Question Part B – Pg 7
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Part B Question 1 b. A construction construction firm has the following following abridged balance sheet:
RM(‘000,000)
RM(‘000,000)
Assets Net fixed assets
70
Cash and current assets
30
Total assets
100
Financed by: 7% Debentures
30
Equity capital
60
Current liabilities
10
Total capital
100
Its fixed assets are expected to provide a 15% return over the planned investment horizon. This firm intends to embark on projects that require an initial sinking of RM 30million and are expected to provide in aggregate a 20% return with a standard deviation of 30% over the planned investment horizon. These projects are to be financed wholly by the internally available funds and the debentures are to be redeemed at the end of the planned investment horizon.
Question Part B – Pg 8
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
i)
evaluate, stating your assumptions, the probability that the firm is financially better off by embarking on the intended projects; Assuming:
1. Assets growth by 15% 2. Project growth by 20% with standard deviation of 30% (either +30% or -30%)
By end of year, where; V1 = V0еr , rf = 0.15 and r p = 0.20
thus, value of fixed assets: V f1 = 70е0.15 = 81.328 Million
a) and value of projects: (deviation - 30%) VP1 = 30е0.2x0.7 VP1 = 30е0.14 = 34.508 Million
b) and value of projects: (deviation + 30%) VP1 = 30е0.2x1.3 VP1 = 30е0.26 = 38.907 Million
Base on the above the company financial status shall become better as the Fixed asset shall be increased from 70 to 81.328 Million and the current & cash asset will be either 34.508 Million or 38.907 Million from the current year amount of 30 Million. Therefore the probability that the firm is financially better off by embarking on the intended projects is 100% or equal to 1. Question Part B – Pg 9
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
ii) assuming that it is only able to earn actual returns of 12% on its fixed assets and 15% on its projects, derive the projected balance sheet at the end of the planned investment horizon; Assuming:
1. Assets growth by 12% 2. Project growth by 15%
By end of year, the projected balance sheet: Where: V1 = V0еr , rf = 0.12 and r p = 0.15
thus, value of fixed assets: V f1 = 70е0.12 = 78.9247 Million
and value of projects:
V P1 = 30е0.15 = 34.855 Million
7% debentures:
7% x 30 = 2.1
Net asset = V f1 + VP1 = 111.675 Million
Question Part B – Pg 10
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
Thus, end of year balance sheet shall be as follows;
RM(‘000,000)
RM(‘000,000)
Assets Net fixed assets Cash assets
and
78.92 current
Less charges income
on
34.86 -2.10
Total assets
111.68
Financed by: 7% Debentures Equity capital Current liabilities Total capital
30 [60 + (111.68 – 100)] =71.68 10 111.68
iii) assuming that the projects' expected returns are normally distributed, represent the provided information in suitable mathematical notations; rp ~ N (0.2 , 0.09) rf ~ 0.12
Question Part B – Pg 11
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
iv) assuming that the projects' expected returns are normally distributed, derive an expression for the firm’s value at the end of the planned investment horizon; and V1 = 70е0.12 + 30erp – 2.1
v) stating your other relevant assumptions, derive the probability of its ruin brought about by embarking on these projects. When V0 < 60 , 70е0.12 + 30erp – 2.1 < 60 78.92 + 30e rp – 2.1 < 60 30erp < 60 + 2.1 – 78.92 30erp < -16.92 Since the value is negative, need further clarification. Shall this value is correct, this is meaning the business have no chance to get bankrupt.
Question Part B – Pg 12
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
REFERENCES 1. A Guide to the Project Management Body of Knowledge (PMBOK Guide) – Fourth Edition (2008), Project Management Institute. 2. Associate Prof. Samiappan Marappan, Project Risk Analysis Management, EMRM5103 Notes, November, 2009 – OUM. 3. Duncan Haughey, The Project Management Body of Knowledge (PMBOK), Extracted on 20/11/2010 from website; http://www.projectsmart.co.uk/pmbok.html.. http://www.projectsmart.co.uk/pmbok.html 4. Harold Kerzner (2009), PhD, Project Management (Tenth Edition) , John Wiley & Son, New Jersy. 5. PROJECT RISK MANAGEMENT HANDBOOK Threats and Opportunities , Second Edition Revision 0 May 2, 2007, Caltrans, Office of Statewide Project Management Improvement (OSPMI). 6. Risk Analysis and Management Guidence , June 2005 Extracted on 07/04/2011 from website; www.riotinto.com www.riotinto.com.. 7. Project Risk Management and the application of Monte Carlo Simulation , Quantmleap. Extracted on 07/04/2011 from website; http://quantmleap.com/blog/2010/07/project-risk-management-and-theapplication-of-monte-carlo-simulation/ . 8. Monte Carlo Simulation for Dummies , Quantmleap. Extracted on 07/04/2011 from website; http://quantmleap.com/blog/2009/10/monte-carlo-simulation-fordummies/ 9. An Introduction to Information System Risk Management, SANS Institute Infosec Reading Room. Extracted on 07/04/2011 from website; http://www.sans.org/reading_room/whitepapers/auditing/introductioninformation-system-risk-management_1204.. information-system-risk-management_1204 10. Rupen Sharma, Edited & published by Michele McDonough, Using a Decision Trees Example in Project Risk Management to Calculate Expected Monetary Value, Extracted on 07/04/2011 from website; http://www.brighthub.com/office/projectmanagement/articles/48360.aspx#ixzz1JT2AkpIx.. management/articles/48360.aspx#ixzz1JT2AkpIx
Reference Page i
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
REFERENCES (continued) 11. Extracted on 07/04/2011 http://www.brighthub.com/office/projectmanagement/articles/48360.aspx#ixzz1IYtzwGrQ
from
website;
12. Project management software. Extracted on 07/04/2011 from website; http://en.wikipedia.org/wiki/Project_management_software 13. ProjectManager.com. Extracted on 07/04/2011 http://www.projectmanager.com/project-management.php
from
website;
14. Procore Construction Software Project Dashboard. Extracted on 07/04/2011 from website; http://www.procore.com/construction_project_management_software_features .html.. .html 15. Project management m anagement software, Visitask.com. V isitask.com. Extracted on 07/04/2011 07/04/20 11 from website; http://www.visitask.com/project-management-software-g.asp http://www.visitask.com/project-management-software-g.asp.. 16.Tapas 16. Tapas Kumar, Features of Microsoft Project 2007.Extracted on 07/04/2011 from website; http://www.projectsmart.co.uk/features-of-microsoft-project2007.html.. 2007.html 18.Randall 18. Randall Pruitt, Primavera Scheduling Software Features, eHow.com. eHow.com. Extracted on 07/04/2011 from website; http://www.ehow.com/list_6790681_primaverascheduling-software-features.html#ixzz1JT6Ourdt.. scheduling-software-features.html#ixzz1JT6Ourdt 19. Extracted on 07/04/2011 from website; http://www.scribd.com/doc/17558511/Primavera-Details important Primavera Project Planner® Planning Planner® Planning and Control Guide Version 3.0 20. Extracted on 07/04/2011 from website; http://technet.microsoft.com/enus/library/cc749987.aspx Important*** 21. Deborah Lazicki, Lazi cki, Risk Ris k Management: Managem ent: Tying it all together with Primavera® 2005, Inc. Paul Marin Primavera Systems, Inc. 22. Extracted on 07/04/2011 from http://www.scribd.com/doc/40503257/Primavera-Tips.. http://www.scribd.com/doc/40503257/Primavera-Tips
website;
Reference Page ii
Name: Mohd. Norizam Bin Md. Salleh Matriculation No.: CGS 00534317 Assignment: EMRM5103
23. Himayatnagar Hyderabad, Primavera Project Management, CADD Centre Training Services Extracted on 07/04/2011 from website; http://www.scribd.com/doc/20173674/Primavera-Project-Management.. http://www.scribd.com/doc/20173674/Primavera-Project-Management
REFERENCES (continued) 24. Primavera Project Planner, Planning and Control Guide, Version 3.0, Primavera Systems, Inc. Three Bala Plaza West Bala Cynwyd, PA 19004. Extracted on 07/04/2011 from website; http://www.scribd.com/doc/2539509/Primavera-project-planner-p3.. http://www.scribd.com/doc/2539509/Primavera-project-planner-p3 25. Jay Shukla Shuk la & Kinjal Trambadia, Trambadia, Primavera – Basics , Extracted on 07/04/2011 from website; http://www.scribd.com/doc/50936792/Primavera-Basics http://www.scribd.com/doc/50936792/Primavera-Basics.. 26. An Oracle White W hite Paper P aper June 2009, Successfully Managing Contract Risk by Forming Win-Win Relationships , Oracle Primavera Extracted on 07/04/2011 from website; http://www.scribd.com/doc/50936792/Primavera-Basics http://www.scribd.com/doc/50936792/Primavera-Basics..
Reference Page iii