Project Selection
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The document provides an overview of project selection techniques, outlining methods such as scoring models, benefit measurement models, and mathematical algorithms to evaluate and prioritize projects based on criteria like cost, duration, and projected financial benefits. It emphasizes the importance of decision models, including benefit-cost ratio, return on investment, and net present value, as key metrics for determining project viability. A project steering committee typically oversees the selection process to ensure alignment with strategic business objectives.
![Who We Are Andy Valenti, MSc, PMP Contact [email_address] Andy is the founder and senior consultant of Valenti Partners, a provider of project management solutions. Andy is currently part of the adjunct faculty of Northeastern University and teaches a variety of graduate-level project management courses. For more than 25 years, Andy has provided market research, technology audits, build/buy analysis, new product development, project management, and business development services to financial information vendors, investment management companies, brokerage houses, health care, and non-profit institutions. He holds a MS in Computer Science from Courant Institute, New York University.](https://image.slidesharecdn.com/projectselection-12858130225619-phpapp02/85/Project-Selection-16-320.jpg)
Project Selection
- 1. An Introduction to Project Selection Techniques Andrew P. Valenti, MSc.,PMP Valenti Partners www.valentipartners.com
- 2. What is Project Selection? The act of choosing a project from among competing proposals. Example: Integrating customer and financial databases. Project Selection Steering Committee Scoring criteria include: Links to the strategic goal of increased technological advantage. Can be produced using only internal resources. Meets goal of increasing new sales revenue by 10%.
- 3. Project Selection Methods Scoring Model Committee begins evaluation process Evaluates projects by using a set of criteria with a weight (score) assigned to a criteria Proposals are prioritized by score. Example: Opportunity to implement two new projects but has resources for only one by the end of a fiscal year. Prioritization based on: Projected cost analysis. Projected duration analysis. Projected financial benefits analysis.
- 4. Decision Models System Description Benefit Measurement Models (Economic Models) Analyze the predicted value of the completed projects in different ways. May present the value in terms of: Benefit Cost Ratio (BCR) Return on Investment (ROI) Present Value (PV) & Net Present Value (NPV) Internal Rate of Return (IRR) Opportunity Cost Mathematical Models (Constrained Optimization) Uses different types of mathematical formulas and algorithms to determine the optimal course of action. Linear programming Nonlinear programming Dynamic programming Integer Programming Multi-objective programming
- 5. Decision Models, cont. Benefit Cost Ratio (BCR) Benefit / Cost Benefit is the expected monetary reward created by the deliverable The greater the value, the better the project. For benefit to exceed cost, BCR >1 Example Projected project cost = $20,000 Expect to sell it for $60,000 BCR = $60,000/$20,000 = 3
- 6. Decision Models, cont. Return on Investment (ROI) The percentage profit for the project Example Projected project cost = $400,000 Benefit for first year = $500,000 ROI = $500,000 - $400,000/$400,000 = 25%
- 7. Decision Models, cont. Cash Flow Considers money coming in and going out of an organization Positive cash flow means more money coming in than going out Cash inflow is benefit (income), and cash outflow is cost (expenses) Goal is to select projects with a positive cash flow Cash flow is the basis for more advanced economic models
- 8. Decision Models, cont. Discounted Cash Flow Cash flow models are fine for short-term, low expense projects. For longer term, higher expense projects, we consider the time value of money. The amount that we anticipate receiving from future cash flows is worth less in today’s dollars.
- 9. Decision Models, cont. Discounted Cash Flow Example A project will be earning $160,000/yr in five years. If the APR = 6%, what’s the cash flow worth today? Cash flow is worth $119,561 (in today’s dollars) This is the Present Value (PV) Expected future cash flow is worth $160,000 This is the Future Value (FV) PV = FV / (1 + I) n n = number of periods (years in the case) i = interest rate (APR) PV = 160,000 / (1 + .06) 5 If you are looking at two proposed projects, the project with the highest PV is usually the best choice
- 10. Decision Models, cont. Net Present Value What if we have longer term projects with deliverables at periodic intervals? More sophisticated model than single period discounted cash flow is needed Need to look at PV of the cash flow for each benefit period of the project Using the approach we can find the project’s Net Present Value (NPV) Most multi-year projects are organized to deliver an ROI in each year the project lasts
- 11. Decision Models, cont. Multi-year project NPV Example A retail chain is upgrading each set of stores in a geographic market. As each store upgrades, the project deliverables will be generating cash flow. Thus the project can begin earning money as soon as the first store is upgraded. Finding the Net Present Value Calculate the CF and PV for each project period. Sum up the PV for all of the periods. NPV = PV – Investment in the Project A project with an NPV > 0 is good
- 12. Decision Models, cont. Opportunity Cost By spending this dollar on the chosen project, you are passing up an opportunity to spend it on another project This is the selected project’s opportunity cost.
- 13. Decision Models, cont. Opportunity Cost Example You’ve been offered a project B that will earn you a profit of $100,000 in three months You have an offer of a project A that will earn you a profit of $70,000 in three months. You can only do one project Which one would you choose?
- 14. Decision Models, cont. Opportunity Cost Example What is the opportunity cost of Project A? $100,000 What is the opportunity cost of Project B? $70,000 Project B is selected since it has the smaller opportunity cost Opportunity cost is but one project selection criteria There might be other criteria to consider, e.g. scoring model Project steering committee determines selection methods and process
- 15. Summary Projects are selected to meet some underlying set of business objectives in the strategic plan Typically, a project steering committee consisting of senior executives from each functional department selects the methods and processes used to evaluate project proposals Three categories of methods are available: Benefit measurement method Constrained optimization or mathematical models Scoring Models These methods can be used alone or in combination as determined by the project steering committee
- 16. Who We Are Andy Valenti, MSc, PMP Contact [email_address] Andy is the founder and senior consultant of Valenti Partners, a provider of project management solutions. Andy is currently part of the adjunct faculty of Northeastern University and teaches a variety of graduate-level project management courses. For more than 25 years, Andy has provided market research, technology audits, build/buy analysis, new product development, project management, and business development services to financial information vendors, investment management companies, brokerage houses, health care, and non-profit institutions. He holds a MS in Computer Science from Courant Institute, New York University.