Selection of Competing Projects

The advantages and disadvantages of each of the foregoing methods have been briefly
described as have the cautions that should be heeded in applying the methods to a
particular problem. It should also be noted that the successful use of any of the more
sophisticated techniques is very dependent on the assumptions made regarding the data
serving as input to the model. The strategic goals of a company regarding growth,
markets. and risk capacity must also be carefully weighed when selecting the
performance measures. Two approaches commonly used when comparing competing
projects at the preliminary stage are the hurdle and ranking approach. Hurdles are
minimum goals that a project must meet in order for it to be continued (e.g., payback in
less than five years, or NPV equal to or greater than the firm's reinvestment rate). This
approach is particularly well suited for decision making in the exploratory and preliminary
development phases where uncertainty regarding the accuracy of many key variables is
high. A more rigorous approach might unnecessarily penalize a project in the very early
stages.