Project Selection Methods

This sections describes the various numeric and non numeric methods of project selection with simple explanation.

1. BA5028 – Project Management By Dr.M.Manikandan

2. Project Selection Delivering the wrong project on time and on budget with 100% of its scope completed to the defined quality standards is a complete waste of money! But what if we chose the wrong project?????????

3. Project Selection - Meaning Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement some set of them so that the objectives of the parent organization will be achieved . The proper choice of investment projects is crucial to the long-run survival of every firm. Daily we witness the results of both good and bad investment choices . Then how the selection should be???????? A Multi-Criteria Analysis (MCA) is when a project is evaluated by more than just monetary terms. It is a form of appraisal that, in addition to monetary impacts, measures variable such as material costs, time savings and project sustainability as well as the social and environmental impacts that may be quantified but not so easily valued.

4. C riteria of Project Selection Models Realism - reality of manager’s decision Capability - able to simulate different scenarios and optimize the decision Flexibility - provide valid results within the range of conditions Ease of Use - reasonably convenient, easy execution, and easily understood Cost - Data gathering and modeling costs should be low relative to the cost of the project Easy Computerization - must be easy and convenient to gather, store and manipulate data in the model

5. Numeric models Competitive Necessity Project selection Methods Sacred Cow Operating Necessity Product Line Extension Comparative benefit model project is suggested by a senior and powerful official in the organization P roject is required to keep the system running Project is necessary to sustain a competitive position projects are judged on how they fit with current product line, fill a gap, strengthen a weak link, or extend the line in a new desirable way. several projects are considered and the one with the most benefit to the firm is selected

6. Numeric models

7. Unweighted 0-1 Factor Model A set of relevant factors is selected by management and then usually listed in a preprinted form. One or more raters score the project on each factor, depending whether or not it qualifies for an individual criterion. The criteria for choices are: A clear understanding of organizational goals A good knowledge of the firm’s potential project portfolio Advantage of this model is that it uses several criteria. Disadvantages are that it assumes all criteria are of equal importance and it allows for no gradation of the degree to which a specific project meets the various criteria.

8. Unweighted 0-1 Factor Model - Example

9. Unweighted Factor Scoring Model This model is used by constructing a simple linear measure of the degree to which the project being evaluated meets each of the criteria. Often a five-point scale is used to evaluate the project. A variant of this selection process might choose the highest scoring project . The criteria are all assumed to be of equal importance.

10. Project Criteria Project A Project B Project C Project D A Payoff Potential 3 1 2 3 Lack of Risk 1 2 2 3 Safety 3 2 1 2 Competitive Advantage 2 2 1 2 Total 9 7 6 10 Weighted Factor Model - Example High = 3 Medium = 2 Low = 1

11. Weighted Factor Scoring Model A weighted factor scoring model is when each of the relevant factors selected by management is given numeric weights to reflect the importance of each of them in the project. The weights may be generated by any technique that is acceptable to the organization’s policy makers. Each project receives a score that is the weighted sum of its grade on a list of criteria. Scoring models require: agreement on criteria agreement on weights for criteria a score assigned for each criteria

12. Assessment Criteria Importance Weights 1. Payoff potential 4 2. Lack of risk 3 3. Safety 1 4. Competitive advantage 3

13. Project Criteria Project A Project B Project C Project D A Payoff Potential 12 4 8 12 Lack of Risk 3 6 6 9 Safety 3 2 1 2 Competitive Advantage 6 6 3 6 Total 24 18 18 29 Score X weight Take the score from the previous table and multiply that score with the weightage

14. Net Present Value Net present value (NPV) is the difference between the present value of cash inflows and the present  value of cash outflows over a period of time . NPV is used in  capital budgeting  and investment planning to analyze the profitability of a projected investment or project .

15. Internal Rate of Return The internal rate of return is a discount rate  that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis. IRR calculations rely on the same formula as NPV does .

16. Cost Benefit Analysis A cost-benefit analysis is a process businesses use to analyze  decisions. The business or analyst sums the benefits of a situation or action and then subtracts the costs associated with taking that action .

17. Payback Period The payback period refers to the amount of time it takes to recover the cost of an investment. Simply put, the payback period is the length of time an investment reaches a break-even point . The desirability of an investment is directly related to its payback period. Shorter paybacks mean more attractive investments .

18. Discounted Payback Period Discounted payback period is a capital budgeting method used to calculate the time period a project will take to break even and recover the initial investments. The calculation is done after considering the time value of money and discounting the future cash flows .

19. Return on Investment (ROI) Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments. ROI tries to directly measure the amount of return on a particular investment, relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment. The result is expressed as a percentage or a ratio . For Example, For example, suppose Joe invested $1,000 in Slice Pizza Corp. in 2017 and sold his  stock shares  for a total of $1,200 one year later. To calculate his return on his investment, he would divide his profits ($1,200 - $1,000 = $200) by the investment cost ($1,000), for a ROI of $200/$1,000, or 20 percent.

20. Murder Board A murder board is also known as a scrub-down. You constitute a murder board, which is a committee that comprises of senior managers and subject matter experts from different areas. The murder board scrutinizes the project to find reasons why the project should not be selected. You must defend the project and counter all the queries of the board members . The murder board makes sure that every aspect of the project is looked into and reviewed in depth. The review includes the following aspects of the project: Problem statement Assumptions Risks Mitigation Proposed solution

21. Peer review Peer review is the method of project selection that you use to validate the project with the help of peers. The peer group in such reviews are experts from various areas of project management, however, unlike the murder board, this group is not as ruthless in reviewing a project. In this method, the main objective is not to kill the project but to check the viability of the project and add value from learning of the peer group . In your personal capacity, you tend to ignore or get biased about your ideas. As a result, you might not foresee an issue arising later in the project life cycle. To avoid such unpleasant scenario, it is always a good idea to get inputs from the peers at an early stage.