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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
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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
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