mp10a

1. Introduction
The knowledge of Project Economics is used to take decisions regarding billions of dollars of capital-intensive projects annually. Economics is a social science often summarised as "the study of the allocation of scarce resources in the face of unlimited human wants". Problems of scarcity and choice confront every individual and every society and the management of scarce resources will be as much a problem in the present and beyond as it has been in the past.

This course provides a broadly-based introduction to the study of project economics. The course introduces a range of economic principles to consider and appreciate solutions to resource allocation issues and contribute to discussions.

This course includes information regarding the historical projects with large cost overrun, basic economics of project management, budgeting, time value of money concept, influence on projects with interest rate variation, inflation, and taxation, decisions regarding investment in projects, PMBOK knowledge area project cost management.

The course includes case studies and home exercises to develop knowledge, skills and competences of students through real situations and by introducing different scenarios. EuroMPM is a combination of students from different nationalities. The students will be required to introduce their national project of huge economic significance in order to enhance wide-ranging exposure of the students to internationalization.

The overall aim of this course is to help students to use financial information to improve their decisions as project managers and to learn and apply tools that maximize value.

The course is also well integrated within the framework of EuroMPM courses. The course is closely related to project finance and serves as the foundation for this course. Knowledge, skills and abilities acquired in the course of project economics will be used in the next course of project finance.

The learning outcomes within framework of European Qualification Framework (EQF) are defined and documented for the knowledge, skills and competence levels. The objectives are to enable students to explain fundamentals of project economics, influence of projects on economy, role of time value in calculations, PMBOK knowledge area project cost management and to consider development. At skills level, they will be able to calculate, interpret, evaluate and apply tools and techniques for capital budgeting, NPV, IRR, Payback. The students will also develop competence to analyze different project investment scenarios and use Microsoft Excel to develop solutions. They understand the relationship between Project economics, Project cost management and Project finance management.

2. Course Structure

 * Introduction**
 * Historical projects
 * Different types of projects
 * Examples of projects with large cost overrun
 * Basic economics for project management


 * Risk & Return, Valuation Methods & Investment Criteria**


 * Interest calculations
 * Internal rate of return
 * Influence of interest rate increase and decrease on projects
 * Project selection rules, cash flows
 * Payback period & discounted payback
 * Net present values
 * Perpetuity, annuity, annuity due
 * Depreciation calculations and its impact on project economic performance
 * Impact of tax on the projects and after tax cash flows
 * Sensitivity analysis, scenario analysis, decision tree


 * Capital Budgeting, Cost Management & Agency Issues**
 * Capital Budgeting
 * Estimate Costs Inputs, tools and techniques and outputs
 * Determine Budget, tools and techniques and outputs
 * Fixed cost, variable cost, opportunity cost, sunk cost, breakeven analysis
 * Control Cost, tools and techniques and outputs
 * Knowledge area project cost management (PMBOK)
 * Principal-Agency-Theory
 * Some recommended extensions in the Knowledge area and discussions

Class exercises and home exercises will be used to elaborate the concepts. Students should bring calculators in the class.

3. Case Studies

 * Short calculations are included in all sessions.
 * Selected Harvard case studies are included in the course.

4. Parameters
ECTS: 3 Hours of study in total: 90 Weekly hours per semester: 2 Course characteristics: compulsory Course frequency: every year - winter semester Maximal capacity: 15 students Course admittance prerequisites: no special requirements Skills trained in this course: professional, methodological, and personal skills Assessment of the course: **One exam for MP05a and MP06a** Teaching staff: Prof. Dr. Katrin Löhr, Rao Aamir Khan, NN
 * Contact hours: 30
 * Self study hours: 60
 * 75% contributions within the course (homework, group work, presentations, case studies)
 * 25% written or oral examination at the end of the course

5. Learning outcomes
The students can explain
 * 5.1 Knowledge**
 * fundamentals of project economics
 * influence of projects on economy
 * different types of projects
 * historic projects with large cost overrun
 * PMBOK knowledge area project cost management
 * in reasons for project disappointment
 * project selection methods for investment
 * and discuss the role of time value in calculations, the use of computational aids, and the basic patterns of cash flow.
 * the concept of future value and present value, their calculation for single amounts, and the relationship between them.
 * the effect that compounding interest more frequently than annually has on future value and the effective annual rate of interest.
 * the motives for key capital expenditure and the steps in the capital budgeting process.
 * and define basic capital budgeting terminology
 * the procedures involved in determining deposits needed to accumulate to a future sum

The students are able > in a given context.
 * 5.2 Skills**
 * to differentiate between internal and external projects
 * to calculate both the future value and the present value of a mixed stream of cash flows
 * to calculate the initial investment associated with a proposed capital expenditure
 * to calculate, interpret, and evaluate the payback period
 * to calculate, interpret, and evaluate the net present value (NPV)
 * to calculate, interpret, and evaluate the internal rate of return (IRR)
 * to find the future value and the present value of both an ordinary annuity and an annuity due, and the present value of perpetuity
 * to find the relevant operating cash inflows associated with a proposed capital expenditure
 * to determine the terminal cash flow associated with a proposed capital expenditure

The students are able to > in a new context / project.
 * 5.3 Competence-attitude**
 * support expansion versus replacement decisions
 * select sunk costs and opportunity costs
 * select and determine relevant cash flows and the relevant discount rate for the NPV calculation
 * use net present value profiles to compare NPV and IRR techniques
 * understand the role and use of capital budgeting techniques in the capital budgeting process


 * 5.4 On scaling outcomes**


 * Analysis - NPV and IRR in terms of conflicting rankings and the theoretical and practical strengths of each approach.
 * Analysis – impact of use of different methods of depreciation on the project profitability
 * Analysis – Variation in the tax rate and its impact on profit
 * Problem solving – Perform sensitivity and scenario analysis on projects
 * Tools – CVP Analysis
 * Tools – NPV, IRR
 * Tools – Microsoft Excel
 * Tools – PMBOK knowledge are project cost management
 * Linking - Project economics with project cost management and project finance management

6. Teaching and training methods:

 * Lectures introducing concepts, methods and tools
 * Group work to practice concepts and methods, to develop skills and to work on case studies
 * Home work to add individual contributions

7. Course mapping
This course is linked to other courses of the study program in the following way:


 * MP01a introduces to the study programme and to each individual course.**

MP02a follows MP01a embedding projects into life-cycles, and considering maturity models for project management, as well as customer relationship and a deeper stakeholder analysis.
 * MP02a: Life-cycle Concepts, Maturity Models, Customer Relation Ship, Stakeholder Management**

Project planning includes cost planning. Project economics helps to manage costs.
 * MP03a: Project Planning**

Project planning, project economics, and project risk management are strongly linked.
 * MP04a: Managing Risk**

Results of project economics are embedded in project control. Cost control is a core issue of project control.
 * MP06a: Project Control**

Team members contribute to project economics - and need skill in cost accounting.
 * MP07a: Team management (Human Resource in Projects)**

Project economics and project organization must be balanced.
 * MP08a: Project Organization**

For Project Economics there are standards like PMBOK, PMI Guide to Program Management, that are discussed in MP09a and are continued in MP16a.
 * MP09a: Standards and Mainstreams**

Quality management principles and processes shape project economics.
 * MP10a: Managing Quality**

Communication must support project economics.
 * MP11a: Communications**

Information and knowledge management contribute to project economics.
 * MP14a: Information and Knowledge Management**

Project finance is based upon project economics.
 * MP15a: Project Finance**

The impact of changes on project economics have to be considered.
 * MP17a: Change Management**

Project economics is embedded in program management.
 * MP18a: Program and Portfolio Management**

Issues on safety, health and the environment have to be considered in project economics.
 * MP20a: Safety, Health and the Environment**

8. References:
Most course materials are available in ILIAS and additional web portals- a few books to mention here:
 * 1) PMI: A Guide to the Project Management Body of Knowledge - PMBOK® - 4th edition 2008, ISBN 1933890665.
 * 2) Harold Kerzner: Project Management: A Systems Approach to Planning, Scheduling, and Controlling, John Wiley & Sons 10th edition 2009, ISBN0470278706.
 * 3) Ursula Kuehn: Integrated Cost and Schedule Control in Project Management, Kogan Page: 2nd edition 2011, ISBN 1567262961.
 * 4) Charles T. Horngren, George Foster, Srikant M. Datar, Madhav V. Rajan, Chris Ittner: Cost Accounting: A Managerial Emphasis, Prentice Hall 13th edition 2008, ISBN 0131355589.
 * 5) Lawrence J. Gitman: Principles of managerial finance, Pearson Education 11th Edition 2008, ISBN 8177585541.