CHAPTER 3- PROJECT SELECTION.ppt

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Chapter 2:

ProjectSelection



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Project Initiation: Strategic

Planning and Project Selection

• The first step in initiatingprojects is to look at the bigpicture or strategic plan of anorganization

• Strategic planning involvesdetermining long-term businessobjectives

• Projects should supportstrategic and financial businessobjectives



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Project Selection

• Process of evaluating project andthen choosing to implement some

set of them so that the objectives

of the parent organization’s will

be achieved.



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Criteria of Choice

• Three important criteria forprojects:

– There is a need for the project

– There are funds available – There’s a strong will to make the

project succeed



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Project Evaluation Factors

• Production factors (e.g. safetyprocess)

• Marketing factors (e.g. potential

market)• Financial Factors (e.g. NPV)

• Personnel Factors (e.g. laborskill requirements)

• Administrative Factors (e.g.government standard)



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Types of Project Selection

Models

1. Nonnumeric models2. Numeric models : Profit /

Profitability



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Nonnumeric Models

1. The Sacred Cow – suggestedby a senior and powerful

official

2. The Operating Necessity3. The Competitive Necessity

4. The Product Line Extension

5. Comparative Benefit Model



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Numeric Models

1. Payback period – compare by yearof loan (total)

2. Rate of Return- by Rate of Cost

(ROC) and Rate of Investment (ROI)

3. Discounted Cash Flow (NPV)- inflow

by quarter times Present Value

(PV)= 1/A; A = (1+i)-n

4. Profitability Index = net profit/cost

5. Scoring



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Net Present Value Analysis

• Net present value (NPV) analysis is a

method of calculating the expected

net monetary gain or loss from a

project by discounting all expected

future cash inflows and outflows to thepresent point in time

• Projects with a positive NPV should be

considered if financial value is a key

criterion

• The higher the NPV, the better



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Figure: Net Present Value Example

Excel file

http://localhost/var/www/Local%20Settings/Temp/Temporary%20Directory%202%20for%20PMTraining-Part1.zip/Fig4-2.xls




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Return on Investment

• Return on investment (ROI) isincome divided by investment

ROI = (total discounted benefits - totaldiscounted costs) / discounted costs

• The higher the ROI, the better

• Many organizations have arequired rate of return or

minimum acceptable rate ofreturn on investment forprojects



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Payback Method

• Another important financialconsideration is payback analysis

• The payback period is the amount of

time it will take to recoup, in the

form of net cash inflows, the net

dollars invested in a project

• Payback occurs when the cumulative

discounted benefits and costs aregreater than zero



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Weighted Scoring Model• A weighted scoring model is a tool that

provides a systematic process for selectingprojects based on many criteria – First identify criteria important to the project

selection process

– Then assign weights (percentages) to each

criterion so they add up to 100% – Then assign scores to each criterion for each

project

– Multiply the scores by the weights and get the totalweighted scores

• The higher the weighted score, the better• See “What Went Right?” for a description of

how a mortgage finance agency uses aweighted scoring model for projects.



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Figure: Sample Weighted Scoring

Model for Project Selection

Excel file



CHAPTER 3- PROJECT SELECTION.ppt

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