Project Management: Pricing the Risk, Return on Equity - Assignment Example

Name Instructor Course Date Question 1a Pricing the risk in price feasibility can be executed in the ways stated, the first step is provision of the technical definition of the project, this entails the required standards will the executed on the project. In addition, the maintenance cycles expected. The second step is calculating the direct costs, which are costs that can be assigned to a particular project. These costs must be based on a recent public sector project to deliver the same projects, which include foreseeable efficiencies (Fight 50). Capital costs entail delivery of new services such as design, land, raw materials and development. Capital costs do not only refer to the above but also accounts for the labor, management and training costs these also includes the legal, procurement, technical and also project management services. It is significant to include the cost the cost of asset replacement. Maintenance cost these are costs for full project maintaining of assets needed to deliver a given output, this also includes the cost of equipment and tools, labor associated with maintenance of that particular maintenance project. Maintenance is assumed consistent with the capital and the operating cost forecast. Operating cost also lies under estimation of direct cost. It is associated with day to day functioning of the service also the whole costs of the staff, which includes salaries and wages, benefits of employees, annual leave, insurance, and redundancy, and raw materials. Step three is detecting the indirect costs, this are the projects overhead costs which are the cost accounting, legal services, senior management efforts, communication and other resources required by the project. More appropriate method of allocation include the ratio of project employees to institutional staff catering for personnel cost. Project costs to institutional costs for accounting costs. Lastly the billing costs that are the number of project customers compared to the number of institutional costs Revenue identification as a way of pricing the risk, this is the total cost of service delivery but it should be paid by the revenues to be collected. A project can generate revenue from, users paying for the service, third parties being allowed to use the project and lastly use of assets to generate income The last step is explanation of the assumptions in this stage, a detailed and clear explanation is given about the rates of inflation, depreciation, treatment of assets and also the governments Medium Term Expenditure Framework. Question 1b Residential development is whereby there is installation of improvements either onsite or offsite, which are important to prepare the land for construction which can be erecting buildings and construction. This development can be for commercial or private use. Residential investment entails buying or acquiring of already build or developed property it can be in cash form or through mortgage, which also differs from whether the property is for commercial use. Residential investment gives a better return on equity. Because the investor is able to easily break through equity capital constraints in order to acquire more. On the hand if the if the return on the property invested is greater than the cost of the money invested in it then it makes the investor accumulates enough wealth. Therefore, the investor has a significant magnification of returns. Question 1c Return on equity is defined, as the period required to compensate the initial investment expenditure using the cash flow being produced by the project. The period to pay back is suitable for the appraisal of the project. Because projects are judged by the amount of time required to compensate the initial investment projects which payback within a short time is considered over projects which take a longer period of time to pay back. Therefore this technique prefers short lived projects. Return on investment is the ratio between annual gains this measured by annual income after tax and the amount of money invested.ROI is more adequate because the whole cycle of the project is taken into consideration. This technique is mostly used by researchers. Unlike ROE, ROI takes into consideration the value of money and this therefore is not useful when dealing with mutually exclusive projects. Internal Rate Return (IRR) corresponds to the rate at which the current value of the investment’s money in-flows are equal to the to the money out-flows, time and value of money is taken into consideration by factoring in the discount factor in this technique unlike the ROE and ROI. Although this method also has its own disadvantages. It makes it difficult to compare services that differ a big deal in outcome and size.IRR differs from the cost of capital therefore it makes it difficult to compare investments in information systems services with others (Rafinejad 351). Question 1d The market trends: a buyer may buy may acquire a business when they know that there is a likelihood in the market that the property will appreciate. Brand name: purchasers may acquire a property which is below 4% yields if the property has a good brand name in which the company can utilize to grow their business. Question 1e A clear economic justification of the project is given; economic consequences of all the financial flows are identified and quantified. A detailed calculation and opportunity costs for all the inputs and outputs, which include marginal costs of public funds, opportunity cost, high, medium and low skill labor and lastly foreign exchange. An appropriate no-project scenario is identified associated economic flow is determined and are treated as the opportunity cost of the project. Economic benefits and the opportunity costs of a no-project scenario are also identified. A breakdown of the economic costs and the usefulness of the project into its financial costs. Question 2a Between 1960 and 1968 there is an increase in price of the commodities with a decrease and leveling demand of the product. This can be attributed to the fact that there is low level of production and most of the people in the market were not demanding for the commodities hence suppliers were covering for cost f production. During 2008 there is an increase in the quantity demanded with a decrease in price. This is because there was a financial crisis which affected the global prices of commodities hence affecting the international market. After the global financial crisis there was a shortage of commodities. Despite the increase in prices there was an increase in the quantity demanded with an increase in medium of the house prices. In addition, there was an increase in the world population which resulted in a shortage of housing facilities. The graph allows one to evaluate the competitors and the shortages in demand for the products of a business organization and its competitors. This is because the number of competitors decreased with an increase in underlying demand of the products. This is crucial in positioning the products and services of an organization. Question 2b Positioning allows clear, concise and complete communication in a project which is important in its success. This allows the project manager to move out of the ordinary decision making to more dynamic practical decision making skills. Positioning allows the business to identify its competitors and helps the business organization to gather the available resources to deal with competition in the market. In addition, position makes it easy for the organization to define its strategic developments in future. Question 3a Discount rate for practical purposes is similar with the risk-adjusted cost of capital to government. On project feasibility discount rate is set up by developing a model. The total cost is estimated and compared to the actual price in the market the difference helps the buyer to come up with the discount rate of a project (Nicholas & Steyn 368). Question 3b According to Fight (2005), properties with high risk or those expected are most likely to produce a lower return than those of low risk properties, high risk also reduces the amount of rational investors willing to invest in the project. Other effects of risks are the risks might have an effect on the project and may result in an increase in cost, delays or reduction in revenues. Which leads to financial impacts, hence reducing the demand? Question 3c In this case, the discount rates will differ according to the extent of the risk incurred by individual developers this is because the risk will alter the total cost of the whole property, the timing of the risk also since different risks occur at different points of time therefore leading to varied financial effects and therefore the overall price of the whole project hence different discount rates. Question 3d The following principles are ways of improving the ROE; in case of long-term basis the total market equity returns is equal to current dividend yields with dividend growth rate. Since dividends do not grow faster than the economy, a close watch has to be kept on it, to calculate the equity premium, the risk free rate is subtracted (Rafinejad 352). Question 3e NPV is the net present value of a projected cash flow based on the discount rate of the public. While IRR corresponds the rate at which the current value of investment money in-flows and value of money is taken into consideration by factoring in the discount rate. When the cost of are greater than the benefits the project will have negative NPV. The project can only be allowed to continue if the investors’ required return rate is compared to the IRR percent that can make the NPV to be zero, if the investor RRR is less than IRR it means that the project is good and can attract investors. Question 3f Time feasibility is an important input in project management. This is because 1. Allows the project to be completed within the scheduled time 2. Makes use of the available human resource and avoid unnecessary costs. 3. Allows the business organization to make use of the project in time hence make revenue when the project is completed in time. This saves the company extra costs or losses resulting from non-completion of projects. 4. Unlike quantum feasibility, time feasibility allows the project manager to mobilize the required resources and much them with the demands of the business organization. 5. Time feasibility allows the business to enjoy the value within the required timeframe (Nicholas & Steyn 199). Work Cited Fight, Andrew. Introduction to Project Finance. Oxford. Butterworth-Heinemann. 2005. Print Nicholas, John., & Steyn, Herman. Project Management for Business, Engineering, and Technology: Principles and Practice. Amsterdam: Elsevier. 2008. Print. Rafinejad, Dariush. Innovation, Product Development and Commercialization: Case Studies and Key Practices for Market Leadership. Newcastle: J. Ross Publishing Read More