University of Hong Kong

Department of Electrical & Electronic Engineering

MEBS6003 Project management

True or False questions

T1) Payback period is the amount of time it takes you to recover your initial
investment in a project
T2) There is a tendency for different departments or functions to compete for
scarce resources in a zero-sum game when bottom-up budgeting is used to
develop a project budget.
T3) Marketplace conditions influence project initiation.

T4) Contract administration may be handled by a department that is entirely

separate from the project.
T5) You should document the initial communication strategy in the project charter.
T6) The majority of the work is done in the scope process in the Executing
process group.
T7) When NPV of a project is negative, the project cannot payback (calculated
using simple payback calculation)
T8) When NPV of a project is negative, the IRR must also be negative.
T9) When the simple payback period of a project is equal to its life, IRR of the
project must be 0.
T10) When the NPV of a project is 0, IRR of the project must be 0.

T11) Routine audit of company procedures cannot be classified as a project.

T12) Project selection methods are a tool and technique of the Initiation Process
and can be used to choose among alternative ways of doing a project.
T13) Project selection methods are an input to the Initiation Process and can be
used to choose among alternative ways of doing a project.
T14) Project selection criteria are inputs to the Initiation Process of a project.
T15) Project selection methods are used by project sponsors to determine financial
return, public perception, customer loyalty
T16) Cost estimates, duration estimates, baselines for performance measurement
and controls are developed in the Scope Planning Process.
T17) In the Scope Planning Process, the project scope, which produces the
product of the project, is progressively elaborated and documented.
T18) When the WBS is created, the tasks are decomposed into smaller units until
they are small enough to be reliably estimated, and managed by one single
party.

T19) Project does not have a start date.

T20) Project does not have an end date.
T21) A project is to carry out mass production of products.
T22) Risk is highest in the initiating phase.
T23) Most of the costs is spent in the executing phase
T24) Work Breakdown Structure is a bottom up approach.
T25) Poorly defined statement of work will easily lead to scope creep.
T26) Honesty is a luxury which one cannot afford when asked to prepare budget
estimates.
T27) Project budgets should be as flexible as possible.

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

T28) In a sensitivity analysis, each risk driver is varied at a time, either in small
increments or from optimistic to pessimistic estimates while keeping all other
drivers fixed, to see the effect of variation of the risk driver. The process is
repeated for all risk drivers.
T29) Sudden increases in material costs should be covered in your organization’s
disaster recovery plan.

T30) A project manager is allowed to initiate a project.

T31) The scope statement includes a description of project objectives, such as

cost, schedule, and quality measures.
T32) The scope statement provides a documented basis for preparing the work
breakdown structure (WBS).
T33) The scope statement can sometimes be part of the contract between the
buyer and seller.
T34) The scope statement can never be developed by functional managers during
the conceptualization phase of a project.
T35) A project phase can consist of one or more iterations of the project life cycle.
T36) The project life cycle consists of activities, whereas project phases are
defined to control the overlapping activities.
T37) The project life phases are known as the project life cycle collectively.
T38) The project life cycle contains the iterative, incremental elements inside a
project phase.

Multiple-choices questions

MC1) Which of these indirect costs is typically classified as an overhead cost?

A) advertising
B) shipping
C) sales commissions
D) taxes

MC2) A systems analyst is paid at the rate of $500/hour and will be needed for
40 hours. Her employer uses an overhead multiplier of 60% and does not
factor in personal time. Her total direct labor cost that should be billed at:
A) $20,000.
B) $32,000.
C) $10,250.
D) $40,500.

MC3) Workers paid $150.00 per hour with an overhead charge of 1.45 and a
personal time allowance of 1.15, have what total direct labor cost for an 8-
hour workday?
A) $1513.00
B) $1740.00
C) $2001.00
D) $2368.00

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

MC4) The charge that is most likely a fixed cost is for:

A) material.
B) construction equipment rental.
C) direct labor.
D) utilities charges.

MC5) An activity with a learning rate of 0.9 takes 20 hours for the first iteration.
How long will it take to complete this task for the 10th time?
A) 0.9 hours
B) 10 hours
C) 14 hours
D) 17 hours

MC6) If it takes 50 hours to complete the first unit and the company knows from
experience that the learning rate should be 0.85, how fast can they be
expected to finish the tenth unit?
A) 29 hours
B) 38 hours
C) 50 hours
D) 356 hours

MC7) It took 80 hours of analysis to complete the first phase, but the second
phase was done in 74 hours. If this learning rate continues, then the 8 th
analysis should take a mere:
A) 63 hours and 20 minutes, give or take.
B) 68 hours and 30 minutes, give or take.
C) 57 hours and 15 minutes, give or take.
D) 52 hours and 45 minutes, give or take.

MC8) The project plan is supported by the work breakdown structure:

A) the budget, and the schedule.
B) the budget, and the work packages.
C) the work packages, and the schedule.
D) the schedule, and the contingency plan.

MC9) Input is received from an organization's management to create a project

budget in:
A) zero-based budgeting.
B) top-down budgeting.
C) bottom-up budgeting.
D) activity-based budgeting.

MC10) An early warning signal for the potential of an overdrawn budget is created
when:
A) activity-based costing cannot identify drivers.
B) a bottom-up budget never makes it up the chain of command.
C) contingency funds are applied for.
D) a top-down process moves too quickly down to the functional
managers.

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

MC11) You work for a road bituminous paving contracting firm. You are asked to
do a job in Jilin, north east China. Which enterprise environmental factor
do you need to pay closest attention to?
A) Availability of resources
B) Weather
C) Infrastructure
D) Company culture

MC12) Your firm has an enterprise architecture which is tightly controlled. All new
development projects must comply with the enterprise architecture. This is
an example of:
A) An enterprise environmental factor
B) A constraint
C) A stakeholder
D) An organizational process asset

MC13) Which estimating technique is best to use if you know the standard usage
rate for a resource (e.g. how many metres of cable per hour an electrical
installer can pull) to estimate the duration of an activity?
A) Analogous estimating
B) Parametric estimating
C) Three-point estimates
D) Reserve analysis

MC14) Which of the following is an example of coercive power?

A) A project manager who has lunch with the project team every Thursday
B) A project manager who will openly punish any team member who is late
with an activity
C) A project manager who has worked with the technology on the project
for several years
D) A project manager who is friends with all of the project team members

MC15) You are the project manager for a concrete batching plant project. You have
been hired by your organization specifically because of your vast
experience with the technology and with projects of this nature. The project
team is aware of your experience. What type of power do you likely have
on this project?
A) Formal power
B) Coercive power
C) Expert power
D) Referent power

Short questions:

S1) What are the 7 reasons for initiating a project?

S2) What are the three items you need to know before you can compute the
present value of investing in a project?

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

S3) What does SWOT analysis stand for?

S4) Which planning process group process output is the result of project
deliverable decomposition into manageable components, called work
packages?
What are the basic purposes of the Project Management Plan?
Name some of the subsidiary plans to the Project Management Plan.

S5) What is the method of cost estimating which uses a scalable, mathematical
model?
S6) What is the difference between “above the line” and “below the line” costs?
S7) What is the Argyris’ “Theory of Adult Personality”?

S8) The IRR (Internal Rate of Return) of two different projects are calculated to
be the same. However, one is calculated to have negative NPV (Net Present
Value) while the other one is calculated to have positive NPV. What is the
reason?
S9) The payback periods (calculated by simple payback method) of two different
projects are the same. One is calculated to have a negative NPV while the
other one positive. What is the reason?
S10) How to calculate Return on Investment?
S11) What are the 4 main functions of management?
S12) What are the five most salient characteristics of a project which differentiate
project work from routine process work?
Explain why you choose your five characteristics instead of other features.

Long questions

1) Massivesoft Corporation is trying to decide whether or not to invest in a new

software project. The initial investment will be $5 million dollars. The project
has a 40% chance of returning $1 million per year into the future and a 60%
chance of generating only $100,000 in revenues. Assuming that Massivesoft
requires 15% return on capital investments, determine whether or not this is a
viable project.
If Massivesoft decides to wait one year before investing in the project, its odds
of returning $1 million per year improve to 70%. Should Massivesoft wait two
years to initiate the project?
[Ans: -1,933,000, -115,942]

2) A heavy manufacturing company wants to decide whether to initiate a new

project. The success of the project depends heavily on the state of the economy,
which has a 50/50 chance of being strong enough to support the venture. The
project will require an initial investment of $1 million dollars, and the company
expects to earn $500,000 in annual revenues from the project — unless the
economy goes into recession, in which case the project will return only $100,000
per year. The company requires a 12% return on its investments. Should it
undertake the project?
If the company decides to wait a year, the economy has a 75% chance of

K.F. Chan (Mr.) Page 5 of 14 14 Feb 2023

 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

improving sufficiently to ensure $500,000 in annual returns. Does it make sense

to wait for a year before making the investment?
x 1 1 1
Hint: = 1 + + 2 + 3 + ......
x −1 x x x
[Ans: NPV=1,500,000 and 2,083,333]

3) What learning rate is being demonstrated if the first unit takes 15 hours and the
third unit takes 14 hours to complete?
[Ans: 0.9574]

4) Big Mike has to prepare a bid for the swimming pools to be placed in every
backyard in a new housing addition. Each swimming pool represents only a slight
variation on the other, so there is a good opportunity to leverage learning effects
in the bid process. A swimming pool installation can be broken down into four
major steps: excavation, concrete, plumbing, and finish work. Mike has found
the best contractors and asks each of them how long it will take to complete work
on the first pool and what their learning rates are. Amazingly, each contractor is
intimately familiar with learning curve theory and knows what his learning rate is
for this type of work. This information is summarized in the table.

Function First Pool Learning Rate

Excavation 22 hours .95
Concrete 32 hours .90
Plumbing 10 hours .85
Finishing 30 hours .85

How many manhours will it take to complete the 2nd pool? [83.7]
How many manhours will it take to complete the 25th pool? [55.7]
How many manhours will it take to complete all 25 pools? [1623]

5) What are parametric cost estimates and how are they developed?
6) What is the relationship between WBS, scheduling, and budgeting?
7) How are top-down and bottom-up budgets created? What advantages does
each approach hold over the other?
8) What is a budget contingency and state any three reasons it might be useful?
9) What are three benefits of using contingency funds?
10) Lists ways that changes in the project specification (and thereby the costs and
time scale) can be required, and state why this can result in problems.
11) What methods can be employed to classify costs?
12) What are the logical stages for a bottom up estimate?
13) What are common reasons of project cost overruns?
14) Define contingency thinking. How can it be applied to management?
15) What is the relationship between the environment and an organization in the
Open System View?
16) (a) State some of the benefits of delegation.
(b) Describe the 5 main approaches of delegation.
(c) What are the five key aspects of successful delegation?
(d) In what kinds of environment will delegation and empowerment be most
helpful to an organization?

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

17) Discuss the disadvantages and disadvantages of three financial project

screening models of simple payback, NPV and IRR.

18) a) Briefly describe the checklist model, simplified scoring model, the Analytical
Hierarchical Process and the Profile Model used for projects selection.
b) What are the relative advantages and disadvantages of these non-financial
projects selection models?
c) How do AHP address the pitfalls of checklist model and simplified scoring
model? What other problems does the AHP produces?

[Some questions in this tutorial mostly adopted from

➢ “Project Management – achieving competitive advantage” 2nd Ed by Jeffrey K.
Pinto, and
➢ “Project Management” by Mike Field and Laurie Keller]

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

Suggested answers to selected questions

T1) True
T2) False
T3) True. The marketplace conditions, such as resource availability, lending rates,
and competition definitely influence whether a project is initiated and the approach to
the project.

T4) True. Contract administration is often handled by a legal department, contracts

department, or procurement department, not the project team.
T5) False. The communication strategy will be in the project management plan, not
in the project charter.
T6) False. The majority of the project work is done in the Integration process of the
Executing process group.

T7) False – even when a project is able to payback, the NPV can still be negative, if
the discount rate is high.
T8) False – even when the NPV is negative, the IRR can be positive. However, in this
case, the IRR is lower than the discount rate.
T9) True
T10) False – when NPV of a project is 0, the IRR is equal to the discount rate.

T11)True. Project must have a start date and an end date. Routine work cannot be
classified as a project.
T12) True, project selection methods are tools and techniques of the Initiation
Process
T13) False. Project selection methods are tools and techniques of the Initiation
Process, but not input to the Initiation Process.
T14) True. Project selection criteria are inputs to the Initiation Process.
T15) False. Public perception, financial return, customer loyalty etc. are outcome
of the projects themselves and cannot be determined by the project selection methods.
T16) False. Cost estimates, duration estimates, baselines for performance
measurement and controls are developed in the Scope Management Process.
T17) True. Scope planning is to progressively elaborate and document the project
scope that produces the product of the project.
T18) True. The lowest level in a WBS should consists of work packages which can
be estimated both in terms of time and cost, which performance can be easily
monitored. There should be only ONE ownership for each work package.

T19) False. Projects must have a start date and an end date
T20) False
T21) False – a project is to produce a unique product
T22) True – risk is highest in the initiating phase while risk impact will be highest
towards the end of executing phase
T23) True – most of the cost is spent is spent in the executing phase (in the Integration
Process of the Executing Process Group), but amount at stake is of course highest in
the closing stage
T24) False – WBS is a top down approach – with the target of chopping the project up
into smaller, manageable work packages which can then be further sub-divided into
deliverables and activities so that cost and time can be assigned to each for planning,

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

budgeting and for control. Each work package can be seen as a small project of its
own, but it can only have one single ownership – responsibility of which is clearly
defined. In this way the scope of work will be more clearly defined and key tasks will
less likely be omitted.
T25) True – a poorly defined statement of work does not reflect what the client really
wants and will easily result in scope creep.
T26) False – it is most imperative that honesty is exercised when preparing budget
estimates.
T27) True – while people may dream that budgets can be exact, futuristic and neatly
arranged, these are too good to be true. Budgets should be flexible.
T28) True
T29) False – project specific risk events should be covered in the project’s risk
management plan and risk register.

T30) False. A project must be initiated by someone external to the project. Likewise,
the project charter must be authorized by someone external to the project.

T31) True – the scope statement does include project objective, cost, time and quality
performance requirements.
T32) True – the scope statement provides a basis for development of WBS although
it is not directly affiliated with the work breakdown structure (WBS).
T33) True – the scope statement can sometimes be the basis of a contract between
the buyer and seller
T34) False – scope statement can sometimes be developed by a functional manager
T35) False – project life cycle consists of several project phases, viz conceptualization,
planning, execution (and control), and closing.
T36) False
T37) True – project phases added together becomes a project life cycle.
T38) False

MC1) D taxes
MC2) B $32,000
MC3) C $2001.00
MC4) B construction equipment rental

MC5) C (20)(10) log(0.9 ) log(2 )

=14 hours

MC6) A 29 hours
MC7) A) learning rate = 74/80=0.925, time for the 8th iteration is

(80)(8) log(0.925) log(2 )

MC8) (A) The project plan is supported by WBS, budget and schedule.
MC9) B Top-down budgeting
MC10) C – when contingency money is applied for, it gives a warning signal for the
potential of an overdrawn budget.

MC11) B weather – in areas with dire bitter cold climate, weather is always an EEF.

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

MC12) A) EEF – The firm’s infrastructure, including the enterprise architecture, is an

enterprise environmental factor.

MC13) B) – Parametric estimating uses know historical data, such as production rates,
to estimate. Answer A is incorrect because analogous estimating uses comparison
with other, similar project work.
Answer C is incorrect because the three-point estimate use best, worst, and most likely
estimates to calculate duration:
a + 4m + c
D=
6
where D is the estimated activity duration, a is the most pessimistic estimate, c is the
most optimistic estimate, and m is the most likely duration.
Answer D is incorrect because it refers to the process of including contingency
reserves into estimates, not actually calculating estimate.

MC 14) B – punishment is a manifest of coercive power.

MC15) C – Expert power – it is good to have expert power. Unluckily one person
cannot be expert in all aspects of a project operation. Therefore, it is often necessary
for a project manager to exercise other types of power, e.g. personal power.

S1) Market demand, organizational need, customer request, technological advance,

legal requirement, ecological impacts, and social need

S2) Future value, interest rate (or discount rate), number of time periods

S3) Strengths, Weaknesses, Opportunities, and Threats analysis. This is used to

assess strengths and weaknesses in the organization and opportunities and threats in
the environment.

S4) The Work Breakdown Structure (WBS) is the result of decomposing work into
smaller, more manageable components until the work and deliverables are defined to
the work package level.
The Project Management Plan is the result (output) of the develop project
management plan process that documents the actions necessary to DEFINE,
PREPARE, INTEGRATE, and COORDINATE all subsidiary plans (according to
PMBOK)
The subsidiary project management plans could include:
- Project scope management plan
- Requirements management plan
- Cost management plan
- Quality management plan
- Process improvement plan
- Human resource plan
- Communication management plan
- Risk management plan
- Procurement management plan

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

S5) Parametric – parametric estimating uses a statistical relationship to derive cost

estimates.

S8) One possible reason is that the discount rate (made up of inflation rate, interest
rate, cost of capital etc.) is higher than the calculated IRR – in this case, the NPV of
that project will be negative. This can happen when we are comparing two different
investments in two different countries where the inflation rate can be different.
Furthermore, cost of capital (e.g. bank loan interest rate) can also be different from
project to project – riskier project typically requires higher interest rates from banks. A
very high interest rate will also result in a negative NPV, if the company is able to afford
the interest rate at all.

S9) Again, one possible reason is because of different discount rate due to different
cost of capital, for example.

S10) Return on Investment = Profits  investment x 100%

S11) While there can be many different answers, one generally acceptable answer will
be -- Planning, organizing, leading (directing) and control

S12)
Salient characteristics which differentiate projects from routine process work include:
a) there are always the triple constraint of TIME/COST/SCOPE, and
RESOURCES constraints,
b) project is a TEMPORARY, TRANSIENT endeavour having defined life span
with a start date and an end date,
c) undertaken for a business case to achieve an established OBJECTIVE, for a
UNIQUE product, frequently involving CHANGES,
d) NON-ROUTINE work, which always includes an element of UNCERTAINTY
and risk,
e) it operates in a temporary structure in which authority of the project
manager is FUZZY.

Please note that the following points alone are not absolutely correct answers:
- emergency,
- delivering benefits,
- mission focused,
- common goals,
- integrating,
- social construction
Certain routine work may also involve these elements to some extent.
Furthermore, points like multi-disciplined work, multi-disciplinary, ALONE, are
incorrect as well because they may also be applicable to routine process work.

Suggested answers to selected long questions

5) Parametric estimates are a form of comparative estimates, which are based on the
assumption that historical data can be used as a frame of reference for current projects

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

(not necessarily similar projects). Parametric estimation takes older work and uses a
multiplier to account for the impact of inflation, labor and materials increases, and other
reasonable costs. Cost drivers, or unit rates, come from older work – older work can
be your company’s own work or can be from other published sources.

6) The central goal of a budget is the need to support, rather than conflict with the
project's and organization's goals. The project budget is a plan that identifies the
allocated resources, the project's goals, and the schedule that allows an organization
to achieve those goals. The project budget must be coordinated with the project
activities defined in the work breakdown structure, as the WBS sets the stage for
creating the project schedule and the budget assigns the necessary resources to
support the schedule.

7) Top-down budgeting requires direct input from the organization's top management;
in essence, this approach seeks to first ascertain the opinions and experiences of top
management regarding estimated project costs. Bottom-up budgeting begins
inductively from the work breakdown structure to apply direct costs to project activities
that are then aggregated, first at the work package level, then at the deliverable level,
at which point all task budgets are combined, and then higher up the chain to create
an overall project budget. Top-down budgeting has the benefit of experienced senior
personnel getting directly involved in project estimation, but can create friction
between departments, functions, and managers at lower levels in the organization as
they scramble for the largest share of the budget that they can grab. Bottom-up
budgeting emphasizes the need to create detailed plans and facilitates coordination
between project managers and functional department heads. Unfortunately, bottom-
up budgeting reduces top management's control of the budget process to one of
oversight and may result in a disconnect between their strategic plans and the
direction the project is taking.

8) A budget contingency is the allocation of extra funds to cover uncertainties and

improve the chances that the project can be completed within the timeframe originally
specified. Contingency money is added to the project's budget following the
identification of all project costs. There are four reasons why it might make sense to
include contingency funding in project cost estimates:
1) Project scope is subject to change — as the project moves through its
development cycle external events or internal forces can require or call for a
change in scope beyond what was initially planned for.
2) Murphy's Law is always present — if something can go wrong, it will, and this
unfortunate circumstance necessitates additional funds to fix the problem.
3) Cost estimation may not have anticipated interaction costs — one event or work
package interacts with another that requires more work from the first. This
iteration can be accommodated with contingency funds.
4) Normal conditions are rarely encountered — projects are planned for a "normal"
set of operating conditions and quite often, the abnormal occurs.

9) Use of contingency funds is at first glance not a cause for celebration; however,
there are three benefits derived from the use of these funds.
1) The first benefit is that their use recognizes that the future contains unknowns and
the problems that arise are likely to have a direct effect of the project budget. The

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

project has a cushion of contingency to combat the time and money variance.
2) The second benefit is that the company has already made provision for extra
expense and as these funds are used, it opens management's eyes to the
possibility of a significant budget increase on the horizon.
3) Finally, application to the contingency funds givens an early warning signal of
potential overdrawn budget so management can take a close look at the project
and begin formulating additional plans in case the negative trend continues.

10) Ways in which changes can be required are:

➢ unforeseen circumstances arise
➢ The technical imperative (‘keep up with changes in the technology’!)
➢ inadequate specifications
➢ Inadequate planning and design, perhaps due to the management imperative
(“Let’s see people out there sweating!”)
Changes have a cumulative effect on a project; even a modest number of apparently
small changes can make a project overrun its budget or schedule. If changes are not
properly agreed, estimated and the likely effects communicated to all parties, disputes
can arise as a result of the project not adhering to the contract.

16) c) Five key aspects of successful delegation

I) Delegate not only the task but also the authority over resources for that task
II) Sell the task, discuss approaches, reassure, and then be willing to accept
mistakes
III) Delegate to the lowest level possible, bearing in mind the delegatee’s potential
IV) Allow people to learn from their mistakes, but watch out for and prevent
serious ones.
V) Ensure that two-way feedback takes place: reports of progress on the one
hand and guidance and acknowledgement on the other.

17)
Chiefly relative merits of the simple payback period financial model are:
☺ Simple
☺ Easy to understand
☺ Can be discounted to take into account of interest rate, inflation (discounted
payback)
 Limited window for comparison
 Conflicting conclusion if comparing total life cycle profits against payback period
The payback period model tends to favour projects of quicker return but not
necessarily those with longer term benefits.

Chiefly relative merits of the net present value financial model are:
☺ Take into account the time value of cash flow
☺ Enable direct comparison of projects on the same basis – on today
☺ Allow for inflation and deflation
 Mathematically more complicated
 Discount rate can be uncertain especially for the distant future

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 University of Hong Kong
Department of Electrical & Electronic Engineering
MEBS6003 Project management

 Can be easily manipulated to mislead

Major relative merits of the internal rate of return financial model are list below:
 Take into account of the time value of cash flow
 No need to pre-determine a discount rate
 Enable direct comparison between projects
 Bench marked against corporate-wide capital cost
 Mathematically even more involving than NPV
 Benchmark can be misleading because of the differences in project nature

18) b)
Advantages of the checklist model:
a. Easy to tie critical strategic goals for the company to various project alternatives
b. An easy to comprehend and use method
Limitations of the checklist model:
i. Intuitive and not accurate
ii. Wrong to treat evaluations on scale of real numbers. For example, difference
between 3 and 2 is not the same as the difference between 2 and 1. Also how
much difference is there between 3 and 2?
iii. Dependence on the relevance of the selected criteria and the accuracy of the
weightings

Limitations of the Analytical Hierarchical Process (AHP):

1) Current research suggests that this model does not adequately account for
“negative utility”; i.e. the fact that certain choice options do not contribute
positively to decision goals but actually lead to negative results. For example,
suppose that your company identified a strong project option that carried a
prohibitively expensive price tag. As a result, selecting this project is really not
an option because it would be just too high an investment However, using AHP,
you would first need to weigh all positive elements, develop your screening
score, and then compare this score against negative aspects, such as cost. The
result can lead to bias in the project scoring calculations.
2) AHP requires that all criteria be fully exposed and accounted for at the
beginning of the selection process. Powerful members of the organization with
political agendas or pet projects they wish to pursue may resist such an open
selection process.

Disadvantages of Profile Model:

1. They limit decision criteria to just two – risk and return.
2. In order to be evaluated in terms of an efficient frontier, some value must be
attached to risk. Expected return is a measure that is naturally given to
numerical estimate. But because risk may not be readily quantified, it may be
misleading to designate “risk” artificially as a value for comparison among
project choices.

K.F. Chan (Mr.) Page 14 of 14 14 Feb 2023