Weekend Puzzler: Computing the Value/Cost of Time on an Enabler Project

The past several blog articles have been discussing the value breakdown structure (VBS). We still have a bit more to cover on that topic, and I’ll get to that next week.

However, the weekend is upon us, and several readers emailed me that they really enjoy the Weekend Puzzler exercises. So I have put together one on a topic that we will get to soon: the value, and the value/cost of time, of enabler projects.

Identifying enabler projects and computing their true value is extremely important for any organization, and especially for a project manager who is trying to justify the resources that they know they will need. We will explore the important topic of projects in the coming weeks – but for now, and for your weekend puzzling, here is an exercise, with answers below, that should get across some important concepts.

If you want to learn more about managing enabler projects (and indeed, about pretty much everything in my blog!), try my two new books, Managing Projects as Investments: Earned Value to Business Value and Total Project Control: A Practitioner’s Guide to Managing Projects as Investments.

Two Projects in a Program: The Values of Project Steel Donkey and Project Rock Stone

(Among the questions below, the most important information for a project team to understand is in Question #7: the value/cost of time on an enabler project! It is crucial that business analysts provide this analysis for project teams!)

NOTE: For this exercise, all dollars are in current dollars.

You have been put in charge of Project Steel Donkey, a 12-month-long effort to develop and implement the Steel Donkey enterprise-wide system, which is expected to improve efficiency and reduce our organization’s overhead costs by $200,000 per month over the next three years. The budget for the project is $5 million.

One of the advantages of the Steel Donkey system is that, once implemented in its basic form, it can be extended.

The key planned extension is a real-time data communication system for our field personnel that should accelerate decision-making. Such an extension is expected to increase annual revenues. Our business analysts have estimated the probabilities of increase to be as follows:

  • 50% chance of $1 million/month for two years after the extension is put in place.
  • 25% chance of increase of $500,000/month.
  • 25% chance of no change.

The enhancement project, named Project Rock Stone, is expected to take 12 months, and will have a budget of $6 million.

But such an enhancement project cannot start until immediately after Project Steel Donkey is over and the overall system is operating.

  1. What is the total savings, just in overhead costs, expected for the three years after Project Steel Donkey is completed? A. $200,000   B. $720,000   C. $7.2M   D. $36.0M   E. None of the above
  1. What is the average monthly increase in expected revenue for the two years after Project Rock Stone (i.e., three years after Project Steel Donkey) is completed, if Project Rock Stone is completed on schedule? A. $13.5M   B. $15.0M   C. $24.0M   D. $27.0M   E. None of the above
  1. What would be the two-year expected project profit (EPP) of Project Rock Stone if completed on budget in 12 months? A. $4.5M   B. $10.0M   C. $18.0M   D. $21.0M   E. None of the above
  1. What is the three-year expected monetary value (EMV) of Project Steel Donkey if completed in 12 months? A. $7.0M   B. $12.2M   C. $16.2M   D. $22.2M   E. None of the above
  1. What would be the three-year expected project profit (EPP) of Project Steel Donkey if completed on budget in 12 months? A. $2.2M   B. $7.2M   C. $10.2M   D. $11.2M   E. None of the above
  1. What would be the impact on two-year revenues of finishing Project Rock Stone one month earlier or later? A. $625,000   B. $825,000   C. $7.2M   D. $11.2M   E. None of the above
  1. What would be the acceleration premium or delay cost (i.e., change in EMV) for finishing Project Steel Donkey one month earlier or later? A. $200,000   B. $825,000   C. $7.2M   D. $11.2M   E. None of the above
  1. What would be the DIPP at the start of Project Rock Stone, with a budget of $6 million and a schedule of 12 months? A. 1.50   B. 2.00   C. 2.50   D. 3.70   E. None of the above
  1. What would be the DIPP at the start of Project Steel Donkey, with a budget of $5 million and a schedule of 12 months? A. 1.50   B. 2.44   C. 3.05   D. 3.24   E. None of the above
  1. What would be the expected project profit (EPP) and DIPP be for the entire program? A. $0.2M & 1.01   B. $11.2M & 2.02   C. $22.2M & 2.02   D. $33.2M & 3.01   E. None of the above

Written down your answers? Now scroll down for the answers and explanations.

Answers to the Weekend Puzzler: Value/Cost of Time on an Enabler Project

  1. What is the total savings, just in overhead costs, expected for the three years after Project Steel Donkey is completed? A. $200,000   B. $720,000   C. $7.2M   D. $36.0M   E. None of the above

Answer: C. $7.2M.

Explanation: 36 months * $200,000 = $7.2M

  1. What is the average monthly increase in expected revenue for the two years after Project Rock Stone (i.e., three years after Project Steel Donkey) is completed, if Project Rock Stone is completed on schedule? A. $13.5M   B. $15.0M   C. $24.0M   D. $27.0M   E. None of the above

Answer: B. $15.0M.

Explanation: The expected monetary value (EMV) of potential revenues = the probability of them occurring times the value of the revenues.

The probability of generating revenues of $1M/month = 50%.

EMV = 50% * (24 months * $1M) = 50% * $24M = $12M.

The probability of generating revenues of $0.5M/month = 25%.

EMV = 25% * (24 months * $500,000) = 25% * $12M = $3M.

Total EMV of Project Rock Stone over two years = $12M + $3M = $15M.

  1. What would be the two-year expected project profit (EPP) of Project Rock Stone if completed on budget in 12 months? A.$4.5M   B. $10.0M   C. $18.0M   D. $21.0M   E. None of the above

Answer: E. None of the above.

Explanation: EPP = EMV – expected project cost

= $15M – $6M = $9M

  1. What is the three-year expected monetary value (EMV) of Project Steel Donkey if completed in 12 months? A. $7.0M   B. $12.2M   C. $16.2M   D. $22.2M   E. None of the above

Answer: C. $16.2M.

Explanation: EMV of an enabler project = the EMV of the project itself plus the EPP of all projects it enables.

Therefore the EMV of Project Steel Donkey = its own EMV + the EPP of Project Rock Stone

= $7.2M + $9M = $16.2M

  1. What would be the three-year expected project profit (EPP) of Project Steel Donkey if completed on budget in 12 months? A. $2.2M   B. $7.2M   C. $10.2M   D. $11.2M   E. None of the above

Answer: D. $11.2M.

Explanation: EPP = EMV – expected cost of Project Steel Donkey =

$16.2M – $5.0M = $11.2M

  1. What would be the impact on two-year revenues of finishing Project Rock Stone one month earlier or later? A. $625,000   B. $825,000   C. $7.2M   D. $11.2M   E. None of the above

Answer: A. $625,000.

Explanation: Impact = the gain or loss of expected monthly revenues for one month = $15M / 24 months = $625,000/month.

  1. What would be the acceleration premium or delay cost (i.e., change in EMV) for finishing Project Steel Donkey one month earlier or later? A. $200,000   B. $825,000   C. $7.2M   D. $11.2M   E. None of the above

Answer: B. $825,000.

Explanation: Impact = the gain or loss in expected monthly savings + revenues for one month on both Project Steel Donkey AND on the enabled Project Rock Stone = $200,000 + $625,000 = $825,000.

  1. What would be the DIPP at the start of Project Rock Stone, with a budget of $6 million and a schedule of 12 months? A. 1.50   B. 2.00   C. 2.50   D. 3.70   E. None of the above

Answer: C. 2.50.

Explanation: EMV = $15.0M. Budget = $6.0M.

Starting DIPP = $15.0M / $6M = 2.50

  1. What would be the DIPP at the start of Project Steel Donkey, with a budget of $5 million and a schedule of 12 months? A. 1.50   B. 2.44   C. 3.05   D. 3.24   E. None of the above

Answer: D. 3.24

Explanation: EMV = $16.2M. Budget = $5.0M.

Starting DIPP = $16.2M / $5.0M = 3.24

  1. What would be the expected project profit (EPP) and DIPP be for the entire program? A. $0.2M & 1.01   B. $11.2M & 2.02   C. $22.2M & 2.02   D. $33.2M & 3.01   E. None of the above

Answer: B. $11.2M & 2.02

Explanation: For Project Steel Donkey, the DIPP acts as a tracking mechanism for project performance. Project Steel Donkey’s the EPP (and thus the numerator of the DIPP) include all of its equity: its expected savings AND the probability-weighted increase in revenues from Project Rock Stone. However, the cost responsibilities and authority of Project Steel Donkey are limited to the costs of that project only, or $5M. That determines its value/cost of time, and those are the metrics against which it should be measured and tracked.

However, the program as a whole includes the EMVs and budgets of BOTH projects. Thus the program EPP would be:

($7.2M + $15.0M) – ($5.0M + $6.0M) = $22.2M – $11.0M = $11.2M

The Starting DIPP would be EMV divided by program budget, $22.2M / $11.0M

= $22.2M / $11.0M = 2.02

So how many did you get correct?

Fraternally in project management,

Steve the Bajan

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