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Project Management, 2e (Pinto)

Chapter 3

Project Selection and Portfolio Management

3.1 True/False

1) Numeric project selection models, by their very nature, employ objective values. Answer: FALSE Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

2) Every decision model contains both objective and subjective factors. Answer: TRUE Diff: 3 Section: 3.1 Project Selection Skill: Factual AACSB Tag: Reflective

3) A simplified scoring model addresses all the weakness of a checklist model for project screening. Answer: TRUE Diff: 1 Section: 3.2 Approaches to Project Screening and Selection Skill: Conceptual AACSB Tag: Reflective

4) The Analytical Hierarchy Process elegantly addresses scaling issues in criteria and negative utility in alternative scores. Answer: FALSE Diff: 1 Section: 3.2 Approaches to Project Screening and Selection Skill: Conceptual AACSB Tag: Analytic Skills

5) The efficient frontier in a profile model is the set of options that offers a maximum return for a given level of risk or a minimum risk for every level of return. Answer: TRUE Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Factual AACSB Tag: Analytic Skills

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6) The present value of money is lower the further out in the future I expect to spend it. Answer: FALSE Diff: 2 Section: 3.3 Financial Models Skill: Analytical AACSB Tag: Analytic Skills

7) The reciprocal of the payback period is used to calculate the average rate of return for a project. Answer: TRUE Diff: 2 Section: 3.3 Financial Models Skill: Analytical AACSB Tag: Analytic Skills

8) Internal rate of return is preferable to net present value because IRR employs a weighted average cost of capital discount rate that reflects potential reinvestment. Answer: FALSE Diff: 3 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Analytic Skills

9) An options model could be used when financial criteria would change significantly over time. Answer: TRUE Diff: 2 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Reflective

10) The most important thing to remember when using project selection models is to be consistent and objective. Answer: TRUE Diff: 1 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Reflective

11) Because projects managed under a project portfolio management scheme may be independent of each other, it is not necessary to consider resource use when deciding to pursue any single project. Answer: FALSE Diff: 1 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

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12) A balanced project portfolio may be interpreted to mean that a single portfolio contains both high and low risk, low growth and high growth, and risky and safe projects. Answer: FALSE Diff: 2 Section: 3.4 Project Portfolio Management Skill: Factual AACSB Tag: Reflective

13) Successful project management firms rely on home runs and narrowly concentrated efforts since specialization creates name recognition and market share. Answer: FALSE Diff: 1 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

14) Personnel costs comprise one of the highest sources of project expense. Answer: TRUE Diff: 1 Section: 3.4 Project Portfolio Management Skill: Factual AACSB Tag: Reflective

15) If strategy and portfolio are not in sync, the firm is poised on the cusp of success. Answer: FALSE Diff: 1 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

  • 3.2 Fill in the Blank

1) A project selection model that is broad enough to be applied to multiple projects has the virtue of __________. Answer: comparability Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

2) Project selection model come in two general classes:

Answer: numeric, nonnumeric Diff: 2 Section: 3.1 Project Selection Skill: Factual AACSB Tag: Reflective

__________

and __________.

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3) The simplest method of project screening and selection is developing a(n) contains criteria that pertain to a choice of projects. Answer: checklist Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Conceptual AACSB Tag: Reflective

that

__________

4) A simple scoring model assigns

__________

to the criteria used to evaluate projects.

Answer: weights Diff: 1 Section: 3.2 Approaches to Project Screening and Selection Skill: Factual AACSB Tag: Reflective

5) The

method of project screening generates overall project scores that can be

__________ compared meaningfully against each other. Answer: Analytical Hierarchy Process (AHP) Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Analytical AACSB Tag: Analytic Skills

6) In project management, the

is the set of project portfolio options that offers either

__________ a maximum return for every given level of risk or the minimum risk for every level of return. Answer: efficient frontier Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Analytical AACSB Tag: Analytic Skills

7) Financial models are all predicated on the Answer: time value of money Diff: 3 Section: 3.3 Financial Models Skill: Analytical AACSB Tag: Reflective

__________

principal.

8) The

screening method may arrive at multiple solutions, which is one reason it is

__________ used less widely than the net present value technique. Answer: internal rate of return (IRR) Diff: 3 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Reflective

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9) An organization that has some flexibility in postponing a project and might be able to make a better decision with information that would be available at a later date might make use of a(n)

for project screening.

__________ Answer: options model Diff: 3 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Reflective

10)

is the systematic process of selecting, supporting, and managing a firm's

__________ collection of projects. Answer: Project portfolio management Diff: 2 Section: 3.4 Project Portfolio Management

Skill: Definition AACSB Tag: Reflective

11) A firm that offsets risky ventures with more secure projects or new development ventures with existing product line cash cows is desirous of __________. Answer: (project portfolio) balance Diff: 3 Section: 3.4 Project Portfolio Management Skill: Factual AACSB Tag: Reflective

12) A principle cause of project portfolio underperformance is lack of __________. Answer: (adequate) resources Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

  • 3.3 Multiple Choice

1) Souder's project screening criterion that indicates an effective model must reflect organization objectives, including a firm's strategic goals and mission is called:

  • A) realism.

  • B) capability.

  • C) comparability.

  • D) ease of use.

Answer: A Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

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2) A selection model that is broad enough to be applied to multiple projects has the benefit of:

  • A) ease of use.

  • B) comparability.

  • C) capability.

  • D) flexibility.

Answer: B Diff: 2 Section: 3.1 Project Selection Skill: Factual

AACSB Tag: Reflective

3) A project screening criterion that allows the company to compare long term versus short term projects, projects with different technologies, and projects with different commercial objectives is:

  • A) flexibility.

  • B) ease of use

  • C) capability

  • D) realistic

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

4) If a model can be applied successfully by people in all areas and levels of an organization, it is said to possess the trait of:

  • A) capability.

  • B) ease of use.

  • C) flexibility.

  • D) realism.

Answer: B Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

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5) An MBA redesign committee spends the better part of a decade traveling the Caribbean to benchmark graduate programs at other universities. Whatever screening model is being used suffers from poor performance on:

  • A) realism.

  • B) capability

  • C) ease of use

  • D) cost

Answer: D Diff: 1 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

6) Souder's model selection criterion that encourages ease of adaptation to changes in tax laws, building codes, among others, is called:

  • A) ease of use.

  • B) cost.

  • C) capability.

  • D) flexibility.

Answer: D Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

7) A writer estimates it will take three months to generate spiffy documents to accompany a seminal work in operations management. He grossly underestimates the time required and misses his deadline by two months. This estimate was:

  • A) objective and accurate.

  • B) subjective and accurate.

  • C) objective and inaccurate.

  • D) subjective and inaccurate.

Answer: D Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

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8) A wedding planner allows $10,000 for flowers and three weeks to receive all RSVPs back

from the list of 700 guests. Both estimates are correct within a fraction of a percent. We could describe this factoid as:

  • A) numeric and subjective.

  • B) numeric and objective.

  • C) non-numeric and subjective.

  • D) non-numeric and objective.

Answer: A Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

9) An internal operating issue in project screening and selection is:

  • A) expected return on investment.

  • B) change in physical environment.

  • C) patent protection.

  • D) the chance that the firm's goodwill will suffer due to the quality of the finished project.

Answer: B Diff: 2 Section: 3.1 Project Selection Skill: Factual AACSB Tag: Reflective

10) Quality risk refers to the chance that:

  • A) the project relies on developing new or untested technologies.

  • B) the firm's reputation may suffer when the product becomes available.

  • C) the well-being of the users or developers may decline dramatically.

  • D) the firm may face a lawsuit.

Answer: A Diff: 1 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

11) One facet of risk in project screening is:

  • A) the change in manufacturing operations resulting from the project.

  • B) the initial cash outlay.

  • C) the potential for lawsuits or legal obligation.

  • D) the strategic fit of the project with the company.

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

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12) One project factor that directly impacts a firm's internal operations is the:

  • A) expected return on investment.

  • B) financial risk.

  • C) need to develop employees.

  • D) impact on company's image.

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Conceptual

AACSB Tag: Reflective

13) A commercial factor in project selection and screening might be:

  • A) a need to develop employees.

  • B) the likelihood that users of the project are injured.

  • C) the long-term market dominance.

  • D) the impact on the company's image.

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

14) Which statement regarding project selection is best?

  • A) Organizational reality can be perfectly captured by most decision-making models.

  • B) Before selecting any project, the team should identify all the relevant issues that play a role in

project selection.

  • C) Decision models must contain either objective or subjective factors.

  • D) Every decision model has both objective and subjective factors.

Answer: D Diff: 3 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

15) Which statement regarding project selection and screening criteria is best?

  • A) The most complete model in the world is still only a partial reflection of organization reality.

  • B) It is possible, given enough time and effort, to identify all relevant issues that play a role in

project selection.

  • C) Decision models are either objective or subjective.

  • D) For many projects, more than 80% of the decision criteria are vital.

Answer: A Diff: 1 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

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16) A checklist screening model does not consider:

  • A) whether one criterion is more important than another.

  • B) governmental or stakeholder interference.

  • C) product durability and future market potential of the product line.

  • D) the riskiness of the new venture.

Answer: A Diff: 3 Section: 3.1 Project Selection Skill: Conceptual

AACSB Tag: Reflective

17) A simple scoring model for project evaluation requires:

  • A) importance weights from 1 to 10 assigned to each criterion.

  • B) score values assigned to each criterion in terms of its rating.

  • C) a division of weights by scores to arrive at a standardized score for each criterion.

  • D) a summation for each criterion to achieve an overall criterion score.

Answer: B Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

18) The simple scoring model has this advantage over a checklist model for screening projects.

  • A) Scaling from 1 to 5 is extremely accurate.

  • B) Scaling models ensure a reasonable link between the selected and weighted criteria and the

business objectives that motivated their selection.

  • C) Scaling models allow decision makers to treat one criterion as more important than another.

  • D) Scaling models have been proven to make correct decisions better than 95% of the time while

checklists only achieve 80% accuracy.

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

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19) A project manager is using a simple scoring model to decide which of four projects is best, given the company's limited resources. The criteria, importance weights, and scores for each are shown in the table. Which project should be chosen?

 

Importance

Project

Criteria

Weight

Score

Greenlight

 
  • 1 1

3

 
  • 2 2

1

 
  • 3 3

1

Runway

 
  • 1 1

2

 
  • 2 2

2

 
  • 3 3

1

X

 
  • 1 1

2

 
  • 2 2

3

 
  • 3 3

2

Ilevomit

 
  • 1 1

2

 
  • 2 2

2

 
  • 3 3

3

  • A) Project Greenlight

  • B) Project Runway

  • C) Project X

  • D) Project Ilevomit

Answer: D Diff: 2 Section: 3.1 Project Selection Skill: Analytical AACSB Tag: Analytic Skills

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20) A simple scoring model is used to decide among three projects that we'll call A, B, and C.

The total score for project A is 30, for project B is 20, and for project C is 10. Which of the following statements is best?

  • A) If project A is successfully completed, it will yield three times the benefits that project C

would have provided.

  • B) If project C is chosen, the company would benefit only half as much as if they had chosen

project B.

  • C) Project C is better than project B for this company at this point in time.

  • D) Project A is better than project B for this company at this point in time.

Answer: D Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

21) The first step in the Analytical Hierarchy Process:

  • A) requires supporting requirements to be combined into level II challenges.

  • B) is analyzing the process you intend to improve before undertaking any improvement project.

  • C) requires Saatyfication of the team members.

  • D) consists of constructing a hierarchy of criteria and subcriteria.

Answer: D Diff: 1 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

22) The pairwise comparison approach:

  • A) is a method to split the weights assigned to subcriteria.

  • B) is a method to compare pairs of hierarchies prior to any further analysis.

  • C) is a means of achieving all project objectives within the allocated time frame.

  • D) may be used instead of AHP if time is limited.

Answer: A Diff: 1 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

23) Which statement about the Analytical Hierarchy Process is false?

  • A) AHP scores are significant.

  • B) AHP can be used to capture choice options that do not yield positive outcomes.

  • C) AHP can improve the process of developing project proposals.

  • D) AHP groups subcriteria that share the weight of a common higher-level criterion.

Answer: B Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

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24) The Analytical Hierarchy Process is being employed in a project selection decision. One

major criteria, cost, receives a weighting value of 40%, which is split into short-term (50%), intermediate term(30%), and long-term (20%). Which of these statements is best?

  • A) Short-term, intermediate-term, and long-term must receive overall weightings that total

100%.

  • B) There must be at least one other major criteria that has 40% weighting.

  • C) Intermediate-term cost receives a weighting of 12%.

  • D) Long-term cost receives an overall weighting of 80%.

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Analytical AACSB Tag: Analytic Skills

25) The Analytical Hierarchy Process is used to decide among three projects that we'll call A, B,

and C. The total score for project A is .650, for project B is .514, and for project C is .321. Which of the following statements is best?

  • A) Project A is twice as good as project C.

  • B) The analysis must be incorrect because the total scores should sum to 1.00.

  • C) The analysis must be incorrect because there are two total scores that exceed 0.50.

  • D) The analysis must be incorrect because project C's total score is odd.

Answer: A Diff: 1 Section: 3.1 Project Selection Skill: Analytical AACSB Tag: Analytic Skills

26) The profile model plots a graph on a:

  • A) perception-reality pair of axes.

  • B) risk-return pair of axes.

  • C) efficiency-effectiveness pair of axes.

  • D) Saxon-Norman pair of axes.

Answer: B Diff: 1 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

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27) The efficient frontier in project management is the set of portfolio options that offer:

  • A) a minimum return for a minimum risk.

  • B) a minimum return for a maximum risk.

  • C) a maximum return for a minimum risk.

  • D) a maximum return for a maximum risk.

Answer: C Diff: 1 Section: 3.1 Project Selection Skill: Conceptual

AACSB Tag: Reflective

28) Which statement about the use of the profile model is best?

  • A) The profile model requires careful calculation of the percentage risk for each possible project.

  • B) The scale used for the profile model can be any two numerical variables that a company

deems important.

  • C) The efficient frontier in the profile model is where return is 100% (or greater) and risk is 0%.

  • D) For a given level of risk, a positive move on the return axes would indicate a superior project.

Answer: D Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

29) Between projects A and B, project A will be considered a superior financial undertaking if it has:

  • A) a shorter payback period than project B.

  • B) a lower average rate of return than project B.

  • C) a lower net present value than project B.

  • D) a longer payback period than project B.

Answer: A Diff: 1 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

30) Net present value is being used to break the tie among four otherwise equal projects. If the interest rate is 4%, which of these anticipated four-year flows would yield the greatest net present value?

  • A) $10,000 in year 1; $11,000 in year 2; $12,000 in year 3; and $13,000 in year 4

  • B) $13,000 in year 1; $12,000 in year 2; $11,000 in year 3; and $10,000 in year 4

  • C) $10,000 in year 1; $10,000 in year 2; $13,000 in year 3; and $13,000 in year 4

  • D) $11,000 in year 1; $11,000 in year 2; $12,000 in year 3; and $12,000 in year 4

Answer: B Diff: 3 Section: 3.1 Project Selection Skill: Analytical AACSB Tag: Analytic Skills

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31) A company facing an interest rate of 8% must choose among projects offering the following four-year cash flows. If the company is employing the net present value criterion, which project should they choose?

  • A) $25,000 in year 1; $15,000 in year 2; $10,000 in year 3; and $5,000 in year 4

  • B) $5,000 in year 1; $5,000 in year 2; $20,000 in year 3; and $30,000 in year 4

  • C) $15,000 in year 1; $15,000 in year 2; $15,000 in year 3; and $15,000 in year 4

  • D) $5,000 in year 1; $5,000 in year 2; $25,000 in year 3; and $25,000 in year 4

Answer: C Diff: 3 Section: 3.1 Project Selection Skill: Analytical AACSB Tag: Analytic Skills

32) Which of these statements about internal rate of return analysis is best?

  • A) If the IRR is less than the company's required rate of return, the project is worth funding.

  • B) Projects having lower IRR are generally superior to those having higher IRR.

  • C) IRR and NPV calculations always make the same investment recommendations.

  • D) If net outflows follow a period of net inflows, IRR may give conflicting results.

Answer: D Diff: 3 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Analytic Skills

33) Which of these statements about valuation models is NOT correct?

  • A) NPV employs a weighted average cost of capital discount rate that reflects potential

reinvestment.

  • B) IRR and NPV calculations typically make the same investment recommendations only when

the projects are independent of each other.

  • C) If cash flows are not normal, IRR may arrive at multiple solutions.

  • D) IRR is a more robust determinant of project viability than NPV.

Answer: D Diff: 3 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Analytic Skills

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34) A project manager is using the internal rate of return method to make the final decision on which project to undertake. Which of these four projects have the highest internal rate of return?

  • A) $25,000 initial outlay with $10,000 cash inflows during the following five years

  • B) $12,500 initial outlay with $10,000 cash inflows during the following five years

  • C) $25,000 initial outlay with $5,000 cash inflows during the following five years

  • D) $12,500 initial outlay with $5,000 cash inflows during the following five years

Answer: B Diff: 3 Section: 3.1 Project Selection

Skill: Analytical AACSB Tag: Analytic Skills

35) A project manager is using the internal rate of return method to make the final decision on which project to undertake. Which of these four projects have the highest internal rate of return?

  • A) $100,000 initial outlay with $10,000 cash inflows during the first two years, $20,000 during

the third and fourth years, and $30,000 during the fifth year

  • B) $100,000 initial outlay with a $5,000 cash inflow during the first year, $15,000 cash inflow

during the second year, and $25,000 cash inflows during years three through five

  • C) $75,000 initial outlay with a $5,000 cash inflow during the first year, increasing by $5,000 per

year through the fifth year

  • D) $50,000 initial outlay with $5,000 cash inflows during the first two years, $15,000 during the

third and fourth years, and $20,000 during the fifth year

Answer: D Diff: 3 Section: 3.1 Project Selection Skill: Analytical AACSB Tag: Analytic Skills

36) Options models are used to assist in project selection decisions:

  • A) when IRR calculations are favorable but NPV calculations are unfavorable.

  • B) when a company may not recover the money it invests in a project.

  • C) when NPV calculations are favorable but IRR calculations are unfavorable.

  • D) when a company is guaranteed to recover the money it invests in a project.

Answer: B Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Reflective

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37) Regardless of which selection method a firm uses, it should always:

  • A) be able to predict how much revenue will be returned to the firm each year.

  • B) know which project will ultimately succeed and which ones will fail.

  • C) be objective in their selection method.

  • D) use a weighted scoring technique.

Answer: C Diff: 2 Section: 3.1 Project Selection Skill: Conceptual

AACSB Tag: Reflective

38) The systematic process of selecting, supporting, and managing a firm's collection of projects is called:

  • A) heavyweight project management.

  • B) matrix project organization.

  • C) profile management.

  • D) project portfolio management.

Answer: D Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

39) The concept of project portfolio management holds that firms should:

  • A) regard all projects as unified assets.

  • B) manage projects as independent entities.

  • C) focus on short-term strategic goals.

  • D) focus on long-term constraints.

Answer: A Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

40) A project with the chance for a big payout may be funded if an important criterion is:

  • A) cost.

  • B) opportunity.

  • C) top management pressure.

  • D) risk.

Answer: B Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

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41) A project is exceptionally risky might still be undertaken by a firm if they have several other projects underway that are considered more of a sure thing. This approach to project selection is best described by the criterion called:

  • A) strategic "fit".

  • B) risk.

  • C) desire for portfolio balance.

  • D) top management pressure.

Answer: C Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

42) Evaluating projects in terms of their strategic fit with existing project lines or their ability to augment the current product family is known as:

  • A) balance.

  • B) an open criterion

  • C) weighted criterion.

  • D) complementarity.

Answer: D Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

43) Realignment describes:

  • A) the change in a project portfolio with an addition of a new project.

  • B) the shifting of project resources from one to another.

  • C) the change in strategy for a firm.

  • D) the annual recasting of all project managers.

Answer: A Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

44) A proactive project portfolio:

  • A) is as simple as moving from one project opportunity to another project opportunity.

  • B) is an integrated family of projects with a common strategic goal.

  • C) is a collection of projects under the umbrella of single project manager carrying the title of

portfolio manager.

  • D) is developed with respect to short-term operational concerns.

Answer: B Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

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45) Which of these is NOT a factor in successful project portfolio management?

  • A) flexible structure and freedom of communication

  • B) low cost environmental setting

  • C) emphasis on quality

  • D) time paced transition

Answer: C Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual

AACSB Tag: Reflective

46) Multiple project environments thrive on:

  • A) multi-layered bureaucracy.

  • B) rigid development processes.

  • C) narrow communication channels.

  • D) improvisation by project teams.

Answer: D Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

47) A firm is best served if its project portfolio:

  • A) has a number of low-cost experimental prototypes.

  • B) devotes significant resources to hit product "home runs".

  • C) aims to take the marketplace by storm regardless of future trends.

  • D) represents narrowly concentrated efforts.

Answer: A Diff: 1 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

48) Successful firms use project portfolio planning routinely to:

  • A) make quantum jumps from one product to another.

  • B) develop products with long lead times and plan ahead.

  • C) move as quickly as possible into new territory.

  • D) move at glacial pace always within the same product line.

Answer: B Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

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49) If an organization that currently is managing a vast and well-balanced portfolio of projects decides on a new strategic direction, it will initially face the problem of:

  • A) scarce resources.

  • B) a conservative technical community.

  • C) out-of-sync projects and portfolios.

  • D) unpromising projects.

Answer: C Diff: 1 Section: 3.4 Project Portfolio Management

Skill: Conceptual AACSB Tag: Reflective

50) A principle cause of portfolio underperformance is:

  • A) conservative technical communities.

  • B) government intervention.

  • C) out-of-sync projects.

  • D) scarce resources.

Answer: D Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

51) Project portfolio management is typically NOT used to balance:

  • A) human and technical resources.

  • B) risk and return.

  • C) efficiently run projects and nonperformers.

  • D) various families of projects.

Answer: A Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

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3.4 Essay

1) Describe or define any four important attributes for screening models used to evaluate projects. Answer: Souder identifies five important issues that managers should consider when evaluating screening models: realism, capability, flexibility, ease of use, and cost, and the text offers up comparability. Taking these in reverse order, comparability refers to the ability of the criterion to be applied to multiple projects without bias. Cost can be defined as the expense in either time or money (or both) that is required to use the model. Ease of use calls for the model to be simple enough to be used by people in all areas of the organization, both in specific project roles and in those related to functional positions. Flexibility is the quality of ease of modification if trial applications require changes. Capability is the ability of the model to respond to changes in the conditions under which projects are carried out. Finally, realism is the ability of the model to reflect organizational objectives, including a firm's strategic goals and mission. Diff: 2 Section: 3.1 Project Selection Skill: Definition AACSB Tag: Reflective

2) Provide an example of a numeric and non-numeric project selection model and indicate what advantage each might hold over the other. Answer: Project selection models come in two general classes: numeric and non-numeric. Numeric models seek to use numbers for the decision process involved in selecting projects. These values can either be derived objectively or subjectively. Non-numeric models do not employ numbers at decision inputs, relying instead on other data. Each technique has its own merits and may be employed successfully, and a choice between the two should be tempered by the adage GIGO. If a numeric model uses objective, external values that are "correct", then a decision-maker can have a high degree of confidence that the values under study will lead to a reasonable decision. A non-numeric model might appeal to decision makers that have less of a quantitative bent or those that operate in a less quantifiable decision arena. Diff: 2 Section: 3.1 Project Selection Skill: Conceptual AACSB Tag: Analytic Skills

3) Describe any four types of risk that projects may hold. Answer: Risk factors reflect elements of unpredictability for the firm. Technical risks occur due to the development of new or untested technologies. Financial risks arise from the financial exposure caused by investing in the project. Safety risk may arise as the well-being of users or developers of the project is compromised. Any risks to the firm's goodwill or reputation due to the quality of the completed project are termed quality risks. Finally, the potential for lawsuits or legal obligation is legal exposure. Diff: 2 Section: 3.1 Project Selection Skill: Factual AACSB Tag: Reflective

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4) How does a checklist project screening model work? Answer: The simplest method of project screening and selection is developing a checklist of criteria that pertain to a choice of projects and then applying them to the projects. Each potential project is scored against the list of criteria and is rated as performing high, medium, or low with the project scoring highest overall being selected as the project to undertake. Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Factual AACSB Tag: Reflective

5) Your university is considering two projects to increase enrollment: offering traditional classes from midnight to 6 a.m. or offering house call classes where the professor would visit your home to provide instruction. Use a simple scoring model with at least three criteria to evaluate these two potential projects and indicate which project should be chosen. Answer: Answers may vary widely. A simplified scoring model ranks criteria according to their relative importance. Each project is evaluated for performance on each criterion and an overall score for each project is computed by summing the products of each score times its weight. A simple scoring model might be as follows with House Calls narrowly edging out Midnight Classes.

 

Weighted

Project

Criteria & Weight Score

Score

Total Score

Midnight Classes

Time

2

2

4

 

Cost

1

1

1

 

Market Potential 32

 

6

11

House Calls

Time

2

3

6

 

Cost

1

3

3

 

Market Potential 31

 

3

12

Diff: 2 Section: 3.2 Approaches to Project Screening and Selection Skill: Analytical AACSB Tag: Analytic Skills

6) What are the advantages and limitations of simple scoring models? Answer: The simple scoring model has some useful advantages as a project selection device. First, it is easy to tie to critical strategic goals for the company and second, it is easy to comprehend and use. The major limitation of simple scoring models is that the scaling is not very accurate and is often treated as if ratios and difference in scoring levels have real meaning. Another drawback of these models is that they depend on the relevance of the selected criteria and the accuracy of weight given them. Diff: 1 Section: 3.2 Approaches to Project Screening and Selection Skill: Factual AACSB Tag: Reflective

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7) How does the Analytical Hierarchy Process differ from a simple scoring model? Is it worth the extra effort? Answer: The Analytical Hierarchy Process (AHP) is a four-step process that consists of structuring the hierarchy of criteria, allocating weights to criteria, assigning numerical values to evaluation dimensions, and evaluating project proposals. Primary differences between the two approaches are that AHP takes a more rigorous view of the assignment of criteria weights and values to the evaluation dimensions. Differences among evaluation scale items are not necessarily equal and can be adjusted as managers and decision-makers see fit. The resulting product sums have meaning, unlike the values computed in a simple scoring model. AHP methodology can dramatically improve the project selection process over use of the simple scoring model. AHP is not without limitations and does require more effort to configure and use. The authors caution against using a project screening tool that has a poor cost/benefit ratio, so determination of the value derived from use of AHP versus a simple scoring model can best be made on a case-by-case basis. Diff: 3 Section: 3.2 Approaches to Project Screening and Selection Skill: Conceptual AACSB Tag: Reflective

8) Describe the use of a profile model and sketch an example, clearly labeling every component and the best alternative in your example. Answer: Profile models allow managers to plot risk/return options for various alternatives and then select the project that maximizes return while staying within a certain range of minimum acceptable risk. The profile model makes use of a concept known as the efficient frontier—the set of project portfolio options that offers either a maximum return for every given level of risk or the minimum risk for every level of return. A profile model appears below.

7) How does the Analytical Hierarchy Process differ from a simple scoring model? Is it worth

Diff: 3 Section: 3.2 Approaches to Project Screening and Selection Skill: Definition AACSB Tag: Reflective

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9) What is the time value of money principle and how does it apply to project selection? Answer: The time value of money principal suggests that money earned today is worth more than money expected in the future. Future money is expected to be worth less for two reasons: 1) the impact of inflation, and 2) the inability to invest the money. The time value of money principle may be applied to project selection as one criterion to ascertain which project will generate the greatest return on a company's investment. Projects that have a relatively certain return of greater sums of money would be preferred over projects that stand a chance of returning less money in today's dollars. Diff: 1 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Analytic Skills

10) How can a payback period approach be used to evaluate potential projects? Answer: The project payback period approach estimates the amount of time that will be necessary to recoup the investment in a project; that is, how long will it take the project to pay back its initial budget and begin to generate positive cash flow for the company. The discounted cash flow method is used to estimate cash outlays and inflows resulting from investment in a project, and these positive and negative flows are compared using the ratio:

9) What is the time value of money principle and how does it apply to project

Shorter paybacks are preferable to longer paybacks. Diff: 2 Section: 3.3 Financial Models Skill: Analytical AACSB Tag: Analytic Skills

11) What is an internal rate of return and what advantages and disadvantages are accrued by using it to evaluate projects? Answer: Internal rate of return (IRR) is a method of evaluating the expected outlays and income associated with a new project investment opportunity. IRR is the discount rate that equates the present values of a project's revenue and expense streams. If IRR is greater than or equal to the company's required rate of return, the project is worth funding. The advantage of using IRR analysis is its ability to compare alternative projects from the perspective of expected return on investment. IRR suffers from difficulty in conflicting solutions if cash flows are not normal, e.g., if net outflows follow a period of net cash inflows. IRR is not the rate of return for a project. Diff: 2 Section: 3.3 Financial Models Skill: Conceptual AACSB Tag: Analytic Skills

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12) What are options models and when should they be used to evaluate projects? Provide an example. Answer: Options models open financial analysis to consider a greater range of alternatives to immediate investment. Organizations can factor the benefit of postponing decisions (and projects) until financial models indicate projects are worth pursuing. Examples may vary, but suppose firm A can wait until more market research is performed or until a supplier solves quality and logistics issues. The cash flows may be superior to those that would come from immediate investment if company A had to suffer through those issues with their supplier. Because company A can wait a year, the project scores better on the NPV calculations, clearing the company's predetermined financial hurdle and will just have to wait to begin rather than being counted as too great a financial risk. Diff: 2 Section: 3.3 Financial Models Skill: Definition AACSB Tag: Reflective

13) What two simple rules should be followed when choosing a project selection approach? Answer: First and foremost, objectivity and consistency in selection method is paramount. Achieving both objectivity and consistency allows a firm to avoid the pitfall of tweaking results and starting projects that are personal favorites but don't merit pursuit. Second, a wide variety of selection methods may be appropriate for specific companies and project circumstances. As with most things, over-reliance on one end of a scale, whether it is financial, quantitative, or any other, is not the best approach. A broad algorithm that embraces both financial and non-financial considerations is often best. Diff: 2 Section: 3.3 Financial Models Skill: Factual AACSB Tag: Reflective

14) What is project portfolio management and what are its objectives and initiatives? Answer: Project portfolio management is the systematic process of selecting, supporting and managing a firm's collection of projects. Projects are managed concurrently under a single umbrella and may be either related or independent of each other. Portfolio management entails decision-making, prioritization, review, realignment, and reprioritization of a firm's project. Diff: 2 Section: 3.4 Project Portfolio Management Skill: Definition AACSB Tag: Reflective

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15) What are three keys to success for project portfolio management? Which is most important? Answer: The author indicates that the keys to successful project portfolio management are:

flexible structure and freedom of communication; low-cost environmental scanning; and time- paced transition. Answers may vary on the importance ranking. Some may argue that unfettered experimentation is most important in achieving new project or product breakthroughs. Others may tout continuous environmental scanning as a vehicle for quickly adapting a firm's project portfolio and strategy to the changing market conditions. Finally, others may suggest that in both project portfolio management and comedy, timing is everything. Having a stable of projects that are time-phased to launch when others are nearing the end of their useful cycle and still others are bearing maximum fruit will assure a firm of continued success. Diff: 1 Section: 3.4 Project Portfolio Management Skill: Factual AACSB Tag: Reflective

16) Choose any example from recent news media and explain why their project failed. Answer: Examples will vary and may include product launches, public programs, building projects, or any number of other projects. Diff: 2 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

17) Rank the problems in implementing portfolio management from largest to smallest and justify your rankings. Answer: Recent research seems to suggest that the following are among the most common problems in effective portfolio management: conservative technical committees that are beholden to favorite projects, methods or technologies that no longer fit the market or company's strategic thrust; out-of-sync projects and portfolios that may contain worthwhile projects but these projects won't take the company in the direction it is currently targeted; unpromising projects that won't improve a company's operations or revenues; and scarce resources such as human labor, cash, and raw materials. Of these, the text suggests that scarce resources may be the most pernicious problem, although answers will vary in students' rankings. Diff: 3 Section: 3.4 Project Portfolio Management Skill: Conceptual AACSB Tag: Reflective

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