Your SlideShare is downloading. ×
Project Selection
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×
Saving this for later? Get the SlideShare app to save on your phone or tablet. Read anywhere, anytime – even offline.
Text the download link to your phone
Standard text messaging rates apply

Project Selection

12,319
views

Published on

Part of a lecture series on fundamental project management concepts, the lecture presents an overview of project selection methods: scoring,benefit contribution, and economic models.

Part of a lecture series on fundamental project management concepts, the lecture presents an overview of project selection methods: scoring,benefit contribution, and economic models.


3 Comments
2 Likes
Statistics
Notes
No Downloads
Views
Total Views
12,319
On Slideshare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
448
Comments
3
Likes
2
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 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.

×