Apr 1999 PM217: Project Management (Question 3)

(a)	Explain what is meant by cost estimation.	[2]
	Accurate estimation cost means an oraganization will only carry out project which are likely to be profitable and will avoid those which might prove difficult and prove.
(b)	Identify, and explain briefly, six causes of poor cost estimates.	[6]
	Inexperience guesser One major cause of poor estimation is that people making estimation not knowing what they are doing. Lack of continuity between preaward and postaward phase Once the project staff takes over a project of postaward phase they may find themselves in a no-win situation. Bad technical guesser The finital impact of this uncertainty resultant of bad technical guesses as what needs to be done on the project. Psychological factor As people mull over the new project idea, they may grow excited for the project.
(c)	A computer manufacturer wishes to determine which of two systems it should develop by estimating the cost of each using the top-down parametric approach. For Project A, the development time is estimated to be 5 years. The start up costs are estimated to be $100,000. Salary costs are estimated to be $40,000 per year increasing at a rate of 10% a year over the lifetime of the project. For Project B, the development time is estimated to be 4 years. The start up costs are estimated to be higher at $200,000, but salary costs are estimated to be lower at $20,000 per year, increasing at a rate of 15% a year over the lifetime of the project. Express these relationships between startup and annual costs for projects A and B in the form Y = ma^X + b, where X is the time in years after the start of development, and Y is the cost per year of the project. Determine the constants m, a and b for each project, and use them to calculate the total cost of each project. Determine which of the projects the company should undertake.	[12]
	m= first year salary y = mx^x + b m= $40,000 (for project A) $20,000 (for project B) x= (1+r) where r is increasing rate x = n-1 where n = no. of years b = start up cost b= $100,000 (for first year of project A) (year 2 to 5 will be zero) b= $200,000 (for first year of project B) (year 2 to 4 will be zero) Project A Y (for year 1) = 40,000 + 100,000 = 140, 000 Y (for year 2) = 44,000 + 0 = 44, 000 Y (for year 3) = 48,400 + 0 = 48, 000 Y (for year 4) = 53,240 + 0 = 53, 240 Y (for year 5) = 58,564 + 0 = 58,564 total cost = $344, 204 (for project A) Project B Y (for year 1) = 20,000 + 200,000 = 220, 000 Y (for year 2) = 23,000 + 0 = 23, 000 Y (for year 3) = 26,450 + 0 = 26,450 Y (for year 4) = 30,418 + 0 = 30,418 total cost = $299, 868 (for project B) Total cost for project B is lesser than that of Project A. The company should undertake project B.