Topic-2_Selection of Project_Project Selection

Selection of Project

1. Topic-2
Selection of Project

2. Project Selection: Major decision for Top
mgt.(How to select a project??). Project
Selection can be divided into two activities:
•Project Identification
•Project Appraisal
Project Selection:

3. •Project Identification: Brainstorming
(Structured-sequential, 20-30 ideas) and
unstructured.
•Project Identificationis the process of:
•Finding and defining a potential project idea.
•Ensuring it addresses a real-world problem or
seizes an opportunity.
•Assessing whether it's worth pursuing before
investing time and resources.
•Steps in Project Identification
•Need or Opportunity Analysis
•Stakeholder Input
•Initial Feasibility Check
•Define Objectives
•Alignment with Strategy or Mission
Project Identification:

4. Project appraisalis the process of systematically evaluating a
project's feasibility, viability, and desirabilitybefore major
resources are committed to it. It involves analyzing different
aspects of a proposed project to determine whether it is worth
pursuing.
Objectives of Project Appraisal:
•To assess whether the project is financially sound.
•To ensure the project aligns with organizational or
strategic goals.
•To evaluate the risks, costs, and benefits.
•To determine if the project is technically, economically,
socially, and environmentally feasible.
Project appraisal:

5. Key Aspects
of Project
Appraisal:
•Financial Appraisal
•Evaluates investment requirements, costs, returns, cash flows, and
profitability.
•Tools: NPV, IRR, Payback Period, ROI.
•Economic Appraisal
•Looks at the broader economic impact, such as employment,
inflation, and GDP contribution.
•Technical Appraisal
•Assesses whether the technical aspects (technology, processes,
equipment) are appropriate and achievable.
•Market/Commercial Appraisal
•Studies demand, competition, pricing, marketing strategy, and
market trends.

6. •Managerial Appraisal
•Evaluates the capabilities and experience of the
management team.•Environmental and Social Appraisal
•Considers the impact on the environment and
society (e.g.pollution, displacement, social
acceptance).
•Legal Appraisal
•Reviews regulatory requirements, licenses,
compliance issues.

7. Selection Criteria
•Financial Criteria
•Payback
•Net present value (NPV)
•Nonfinancial Criteria
•Projects of strategic importance to
the firm
•Two Multi-Criteria Selection
Models
•Checklist Models
•Multi-Weighted Scoring Models
7

8. Financial
Criteria: The
Payback
Model
•The Payback Model
•Measures the time the project will take to recover the project
investment.
•Desires shorter paybacks.
•Is the simplest and most widely used model.
•Emphasizes cash flows, a key factor in business.
•Limitations of the Payback Method
•Ignores the time value of money.
•Assumes cash inflows for the investment period (and not
beyond).
•Does not consider profitability.
•The Payback formula is
•?????????????????????????????????????????? ???????????????????????????????????? ??????????????????=
????????? ??????? ????
?????? ???????(?? ??? ???? ????)
8

9. Example
•Project A has an initial investment of ₹700,000 and projected
cash inflows of ₹225,000 for 5 years.
•Project B has an initial investment of ₹400,000 and projected
cash inflows of ₹110,000 for 5 years.

11. Exercise
•Twonewsoftwareprojectsareproposedtoayoung,start-upcompany.TheAlpha
projectwillcost$150,000todevelopandisexpectedtohaveannualnetcashflowof
$40,000.TheBetaprojectwillcost$200,000todevelopandisexpectedtohave
annualnetcashflowof$50,000.Thecompanyisveryconcernedabouttheircash
flow.Usingthepaybackperiod,whichprojectisbetterfromacashflow
standpoint?Why?
??????????????????????????????????????????=
??????????????????????????????????????????????????????????????????
???????????????????????????????????? ??????????????????????????????????????????
??????????????????????????????????????????
??????? ?????
=
$150,000
$40,000
=3.75 ??????????????????????????????
??????????????????????????????????????????
??????? ????
=
$200,000
$50,000
=4.00 ??????????????????????????????
A lower payback is better. Project Alpha has the lower payback and so has the better payback.

12. Financial
Criteria: Net
Present
Value (NPV)
•Net Present Value (NPV)
•Uses management’s minimum desired rate of return (discount
rate) to compute the present value of all net cash inflows.
•Prefers positive NPV to negative NPV.
•Desires higher positive NPVs.
•Is more realistic because it considers the time value of money,
cash flows, and profitability.
•The NPV formula using Microsoft Excel is
•?????????????????????????????????????????? ??????????????????= ??????
4
+∑
?
?
(5>?)
?
?
?@5
•where
•I
0
= Initial investment (since it is an outflow, the number will be
negative)
•F
t
= Net cash inflow for period t
•k= Required rate of return
•n= Number of years
12

14. Afive-yearprojecthasaprojectednetcashflowof$15,000,$25,000,
$30,000,$20,000,and$15,000inthenextfiveyears.Itwillcost$50,000
toimplementtheproject.Iftherequiredrateofreturnis20percent,
conductadiscountedcashflowcalculationtodeterminetheNPV.
SincetheNPVispositive,accepttheproject.

15. You work for the 3T company, which expects to earn at least 18 percent on its
investments. You have tochoose between two similar projects. The following chart shows
the cash information for each project. Which of the two projects would you fund if the
decision is based only on financial information? Why?

17. YouaretheheadoftheprojectselectionteamatSIMSOX.Yourteamisconsidering
threedifferentprojects.Basedonpasthistory,SIMSOXexpectsatleastarateof
returnof20percent.
Giventhefollowinginformationforeachproject,whichoneshouldbeSIMSOX’s
firstpriority?ShouldSIMSOXfundanyoftheotherprojects?Ifso,whatshouldbe
theorderofprioritybasedonreturnoninvestment?
Revenue
Stream
Investm
ent
Year
$0$500,0000
$50,0001
$250,0002
$350,0003
Revenue
Stream
InvestmentYear
$0$250,0000
$75,0001
$75,0002
$75,0003
$50,0004
Revenue
Stream
InvestmentYear
$0$75,0000
$15,0001
$25,0002
$50,0003
$50,0004
$150,0005
1. Dust Devils Project
2. Osprey Project
3. Voyagers Project

18. Nonfinancial
Criteria
•Examples of strategic objectives are:
•To capture larger market share.
•To make it difficult for competitors to enter
the market.
•To develop an enabler product, which by its
introduction will increase sales in more
profitable products.
•To develop core technology that will be used
in next-generation products.
•To reduce dependency on unreliable
suppliers.
•To prevent government intervention and
regulation
.
18

19. Two Multi-
Criteria
Selection
Models
•Checklist Models
•Use a list of questions to review potential
projects and to determine their acceptance or
rejection.
•Allow greater flexibility in selecting among
many different types of projects and are easily
used across different divisions and locations.
•Fail to answer the relative importance or value of
a potential project to the organization and does
not allow for comparison with other potential
projects.
•Multi-Weighted Scoring Models
•Use several weighted selection criteria to
evaluate project proposals.
•Include qualitative and/or quantitative criteria.
•Allow for comparison with other potential
projects.
19

20. Checklist
Models:
Sample
Selection
Questions Used
in Practice

21. Multi-Weighted
Scoring Models:
Project
Screening
Matrix

22. Why Project Managers Need to Understand Strategy
•Two main reasons project managers need to understand their
organization’s mission and strategy:
1.Sothey can make appropriate decisions and adjustments.
•How a project manager would respond to a suggestion to modify the design of a
product or to delays may vary depending upon strategic concerns.
2.Sothey can be effective project advocates. They have tobe able to:
•demonstrate to senior management how their project contributes to the firm’s mission in
order togarner their continued support.
•explain to stakeholders why certain project objectives and priorities are critical in order to
secure buy-in on contentious trade-off decisions.
•explain why the project is important to motivate and empower the project team (Brown,
Hyer and Ettenson, 2013).

23. The Strategic Management Process: An Overview
•Strategic Management Defined
•Is the process of assessing “what we are” and deciding and implementing
“what we intend to be and how we are going to get there.”
•Is a continuous, iterative process aimed at developing an integrated and
coordinated long-term plan of action.
•Requires strong links among mission, goals, objectives, strategy, and
implementation.
•Two Major Dimensions of Strategic Management:
1.Responds to changes in the external environment and allocates the firm’s
scare resources to improve its competitive position.
2.Internal responses to new action programs aimed at enhancing the
competitive position of the firm.

24. Four Activities of the Strategic Management Process
•The sequence of activities of the strategic management process is:
1.Review and define the organizational mission
•The mission identifies “what we want to become.” Mission statements identify the scope of the
organization in terms of its product and service.
2.Analyze and formulate strategies
•Formulating strategy answers the question of whatneeds to be done to reach objectives.
Strategy formulation includes determining and evaluating alternatives that support the
organization’s objectives and selecting the best alternative.
3.Set objectives to achieve strategies
•Objectives translate the organization strategy into specific, concrete, measureable terms.
Objectives answer in detain wherea firm is headed and whenit is going to get there.
4.Implement strategies through projects
•Implementation answers the question of howstrategies will be realized, given available
resources.

25. Strategic Management Process

26. Characteristics of Objectives

27. The Need for a Project Priority System
•Implementation of projects without a strong priority system linked to strategy create problems.
•Problem 1: The Implementation Gap
•The implementation gap is the lack of understanding and consensus of organization strategy
among top and middle-level managers.
•Problem 2: Organization Politics
•Project selection may be based not so much on facts and sound reasoning as on the
persuasiveness and power of people advocating projects.
•The term sacred cowis often used to denote a project that a powerful, high-ranking official is
advocating.
•Problem 3: Resource Conflicts and Multitasking
•A multi-project environment creates the problems of project interdependency and the need to
share resources. Resource sharing leads to multitasking—involves starting and stopping work on
one task to go and work on another project, then returning to the work on the original task.

28. Benefits of Project Portfolio Management

29. Project Classification

30. Case 2.2 Fim Prioritization