Sensitivity Analysis of Project Development and Optimization Report

This report provides a comprehensive sensitivity analysis of project development and optimization. It begins by defining sensitivity analysis and its uses, including its theoretical framework for decision-making. The report then delves into economic analysis, covering cash flow estimation (inflow and outflow), NPV calculation, and break-even analysis. It explores the importance of project integration, sensitivity, and economic considerations. The analysis includes tables detailing cash flow, NPV, and break-even points. The conclusion emphasizes the need for project optimization, integration, and sensitivity analysis for successful project execution. Recommendations include DMIAC implementation, time and cost management, and the adoption of the 5S principles to mitigate project management issues and enhance project outcomes. The report emphasizes the need for project managers and team members to consider various project optimization methods.

Running head: SENSITIVITY ANALYSIS
Unit Project: Part C:
Assessment 3: Sensitivity Analysis of Project Development and Optimization
Name of the student:
Name of the university:

1SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
Table of Contents
Introduction......................................................................................................................................2
1. Definition of Sensitivity analysis................................................................................................2
1.1 Use of sensitive analysis........................................................................................................3
1.2 Theoretical framework for using sensitivity analysis for decision making...........................4
2. Economic analysis.......................................................................................................................6
2.1 Estimation of cash flow.........................................................................................................6
2.1.1 Cash In-flow...................................................................................................................7
2.1.2 Cash out-flow..................................................................................................................7
2.2 NPV Calculation....................................................................................................................8
2.3 Break Evan Analysis..............................................................................................................9
Conclusion.....................................................................................................................................11
Recommendations..........................................................................................................................12
Bibliography..................................................................................................................................14

2SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
Introduction
In order to increase the business efficiency and a guaranteed successful outcome of the
business objectives, the competitive edge of the respective industries are needed to be secured
from the external attacks. Most of the business organizations are currently searching different
ways to enhance the business efficiency by developing critical business processes. For
determining the undesirable failure or else organizational success it is very much necessary for
the business analysts to consider certain factors including the first to market, cost
competitiveness, and service and product quality. This report depicts the role of project
development and optimization for gaining competitive advantages and measurable revenue of a
business organization.
In order to process the gathered information in a correct direction in accurate flow it is
important for both the system and business process developers to consider proper improvement
opportunities to the employees and other system developers. It is determined that there are
different project optimizations methods are there such as Business Process Reengineering (BPR),
Lean Management (LM), Kaizen Approach (KA), Six Sigma, Total Quality Management (TQM)
etc. In addition to this different tools are also there for the improvement of decision making in
project optimization. In order to make sensitivity analysis of the developed project certain
effective parameters must be considered, those are also illustrated in this project. In addition to
sensitivity analysis, economic analyses for each parameter are also elaborated in this report.

3SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
1. Definition of Sensitivity analysis
In order to differentiate the sources of both uncertainty and inputs a mathematical model
is used by business operators is known as sensitivity model. The practices related to sensitivity
analysis are uncertainty analysis, uncertainty qualification, uncertainty propagation etc. With the
help of this particular approach the business outcomes of project optimization can be
recalculated. In order to determine the impact of variables considered for sensitivity analysis
include wide range of purposes. The ranges of purposes are as follows:
 For testing the robustness of the generated results of project optimization
approach present in the uncertainty could be calculated
 Relationship between the input and output of the system could become stronger
 Reduced rate of uncertainty
 The communication approaches could be enhanced and at the same time models
can be simplified accordingly
The key Parameters of project management are as follows:
 Project scope
 Project time
 Project integration
 Project quality risks associated to the project
 Project budget
1.1 Use of sensitive analysis
With the help of sensitivity analysis the following components could be served
accordingly:

4SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
Decision making or development of recommendations
Robustness testing for optimal solution
Critical value identification
Sensitivity identification
Su optimal solution investigation
Communication approaches
Credible recommendations development
Allowing the decision makers for selecting assumptions
Commitment convey
Increment in understanding and qualification
Relationship estimation between the input and output variables
Relationship understanding between the input and output variables
Hypothesis development for testing
Development of models
Model testing
Error searching
Mode simplification
Calibrating testing models
Copy the poor rather missing information
1.2 Theoretical framework for using sensitivity analysis for decision making
Decision variable is referred to as a variable over which the decision makers have
effective control. With the help of this control the desired level could be selected however from

5SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
the view of the decision maker, optimal strategies and optimal functions such as profit, social
welfare, expected utility and environmental outcome could be developed accordingly. Not a
single but different alternative strategy could also be developed with the help of the Sensitive
analysis. However, proper observation and experimental design is required to be done for the
implementation of sensitivity analysis.
Following the sensitivity analysis approach it is defined that, based upon the profitability
of different strategies the sensitivity analysis approaches are outline by the project developers.
Again with the changing perception of the optimal strategies are changed or altered. Though, the
modified distributions are not certain because the data are obtained from the sensitivity analysis.
The process of Sensitivity analysis is based on the “Bayesian Decision Theory”, this is referred
to as one of the most powerful approach for decision making n the business organizations. The
other things those are required to be adopted
The components those could be varied in project optimization
 The contribution of single activity to meet the project objective
 The objective of the project optimization include risk minimization of the project
failure
 Limit in constraints
 Technical parameters
In order to develop the project and execute it successfully the necessary steps those are
required to be considered by the business developers include the following:
 The value of the functional objectives
 The value of decision variables

6SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
 Ranking the decision variables
2. Economic analysis
2.1 Estimation of cash flow
Cash Flow is the set of money needed to be invested for the development of the project
by integrating its components professionally. The rate of Return on Investment (ROI) stand high
if the business analyst and the finance manager become able to balance the input of the project
properly.
r 0.03
Ye
ar
Cash
Outflow
Cash
Inflow Cash Flow
Direct
Cash Flow Cum CF
PP (in
years)
0
$
342,100.0
0
$
20,000.00
-$
322,100.00
-$
322,100.0
0
-$
322,100.0
0
1
$
116,700.0
0
$
200,000.0
0
$
83,300.00
$
80,873.79
-$
241,226.2
1 FALSE
2
$
-
$
250,000.0
0
$
250,000.00
$
235,648.9
8
-$
5,577.24 FALSE
3
$
-
$
250,000.0
0
$
250,000.00
$
228,785.4
1
$
223,208.1
8 2.0
Ye
ars
4
$
-
$
-
$
-
$
-
$
223,208.1
8 FALSE
$
458,800.0
0
$
720,000.0
0
$
261,200.00
$
223,208.1
8
RofR = 12.16
% per
annum
IRR 30.7%

7SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
(approx.) =
NPV =
$
223,208.1
8
payback= 2.0 years
1 2 3 4 5
£-
£50,000.00
£100,000.00
£150,000.00
£200,000.00
£250,000.00
£300,000.00
£350,000.00
2.1.1 Cash In-flow
In this particular case project the cash is coming from the consumers who are buying
products and getting services from the company. Another source of cash in-flow is the accounts
department of the company who invest money for the development of the company.
2.1.2 Cash out-flow
The amount of Cash out-flow is the expense of the company itself. If the amount of cash
in-flow is higher than the cash out flow then the cash flow is referred to as the positive cash flow.

8SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
On the other hand, if the rate of cash out-flows is higher than the cash in-flow, then it will be
referred to as negative cash flow.
2.2 NPV Calculation
Cost Benefit Analysis using Present Value
Benefits of the options Year 1 Year 2 Year 3 Year 4 Year 5
project unit
understanding
$
100,000
$
100,000
$
100,000
$
100,000
$
100,000
Buying practice
improvement
$
25,000
$
25,000
$
20,000
$
20,000
$
15,000
service improvement $
15,000
$
15,000
$
15,000
$
20,000
$
25,000
Total Benefits $
140,000
$
140,000
$
135,000
$
140,000
$
140,000
Option for cost Year 1 Year 2 Year 3 Year 4 Year 5
Total cost $
250,000
$ - $ - $ - $ -
Hardware requirement $
50,000
$ - $ - $ - $ -
Functional and
operational cost
$
2,500
$
2,500
$
2,500
$
2,500
$
2,500
Development time $ - $ - $ - $ - $ -
Cost for maintenance $ $ $ $ $

9SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
2,500 2,500 2,500 2,500 2,500
Net cost $
305,000
$
5,000
$
5,000
$
5,000
$
5,000
Total profit $
(165,000)
$
135,000
$
130,000
$
135,000
$
135,000
Cumulative cost $
(165,000)
$
(30,000)
$
100,000
$
235,000
$
370,000
Total cost (NPV @ 5%) ($157,142.8
6)
$122,448.9
8
$112,298.8
9
$111,064.8
3
$105,776.0
3
Cumulative NPV ($157,142.8
6)
($34,693.8
8)
$77,605.01 $188,669.8
4
$294,445.8
8
Year 1 Year 2 Year 3 Year 4 Year 5
($200,000.00)
($150,000.00)
($100,000.00)
($50,000.00)
$0.00
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
$300,000.00
Total cost (NPV @ 5%)
Cumulative NPV

10SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
2.3 Break Evan Analysis
Break Even Analysis
Costs of Existing System Year 1 Year 3 Year 4 Year 5
Net development cost $
-
$
-
$
-
$
-
$
-
Hardware cost $
22,000
$
26,000
$
20,000
$
30,000
$
40,000
Operational and functional
cost
$
22,000
$
20,000
$
18,000
$
11,000
$
19,000
Time for development $
-
$
-
$
-
$
-
$
-
Maintenance cost $
12,000
$
17,000
$
16,000
$
20,000
$
20,000
Existing cost $
56,000
$
63,000
$
54,000
$
61,000
$
79,000
Cost for project optimization Year 1 Year 2 Year 3 Year 4 Year 5
Development cost $
250,000
$
-
$
-
$
-
$
-
Hardware cost $
50,000
$
-
$
-
$
-
$
-
Operational and functional
cost
$
2,500
$
2,500
$
2,500
$
2,500
$
2,500
Development time $ $ $ $ $

11SENSITIVITY ANALYSIS OF PROJECT DEVELOPMENT AND OPTIMIZATION
- - - - -
Maintenance cost $
2,500
$
2,500
$
2,500
$
2,500
$
2,500
Maintenance cost $
305,000
$
5,000
$
5,000
$
5,000
FALSE
1 2 3 4 5
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
Exisitng cost
Maintenance cost
Conclusion
From the overall discussion it can be concluded that in order to execute a project
successfully project optimization, project integration, project sensitivity and project economic
analysis important to be illustrated. For integrating different project components, it is necessary
for the project developers to estimate the cost for each of the processes. With the help of proper
estimation of each phase after the execution of the project it will be able to gain effective
revenue from the competitive market. For developing any business project the project manager