Presentation-on-Project-Selection Ne

Presentation on Project Selection
www.AssignmentPoint.com
 Project selection is the process of evaluating individual
projects or groups of projects, and then choosing to
implement some set of them so that the objectives of the
parent organization will be achieved
 Managers often use decision-aiding models to extract the

relevant issues of a problem from the details in which the
problem is embedded
 Models represent the problem’s structure and can be useful in

selecting and evaluating projects
Criteria of Project Selection Models
 Realism - reality of manager’s decision

 Capability- able to simulate different scenarios and optimize the
decision
 Flexibility - provide valid results within the range of conditions
 Ease of Use - reasonably convenient, easy execution, and easily
understood
 Cost - Data gathering and modeling costs should be low relative to
the cost of the project
 Easy Computerization - must be easy and convenient to gather,
store and manipulate data in the model
Nature of Project Selection Models
 Models do not give any decision
 Partially represent the reality
Project Evaluation Factors
 Production Factors
 Marketing
 Financial
 Personnel
 Administrative
Project Selection Models: Non Numeric
 Sacred Cow - project is suggested by a senior and powerful

official in the organization
Operating Necessity - the project is required to keep the system
running
Competitive Necessity - project is necessary to sustain a
competitive position
Product Line Extension - projects are judged on how they fit
with current product line, fill a gap, strengthen a weak link, or extend
the line in a new desirable way.
Comparative Benefit Model - several projects are considered
and the one with the most benefit to the firm is selected
Project Selection Models: Scoring
Unweighted 0-1 Factor Model
Unweighted Factor Scoring Model
Weighted Factor Scoring Model
Constrained Weighted Factor Scoring Model
Goal Programming with Multiple Objectives
Unweighted 0-1 Factor Model
A set of relevant factors is selected by management and then
usually listed in a preprinted form.
One or more raters score the project on each factor, depending
whether or not it qualifies for an individual criterion.
The criteria for choices are:
 A clear understanding of organizational goals
 A good knowledge of the firm’s potential project portfolio
Advantage of this model is that it uses several criteria.
Disadvantages are that it assumes all criteria are of equal
importance and it allows for no gradation of the degree to which
a specific project meets the various criteria.
Project Criteria Qualifies Not Qualifies
A Payoff Potential x
Lack of Risk x
Safety x
Competitive x
Advantage
Total Score 3 1
Unweighted Factor Scoring Model
This model is used by constructing a simple linear measure of
the degree to which the project being evaluated meets each of the
criteria.
Often a five-point scale is used to evaluate the project.
A variant of this selection process might choose the highest
scoring
project.
The criteria are all assumed to be of equal importance.
Project Project A Project B Project C Project D
Criteria
A Payoff High Low Medium High
Potential
Lack of Risk Low Medium Medium High
Safety High Medium Low Medium
Competitive Medium Medium Low Medium
Advantage
High = 3
Medium = 2
Low = 1
Criteria
A Payoff 3 1 2 3
Potential
Lack of Risk 1 2 2 3
Safety 3 2 1 2
Competitive 2 2 1 2
Advantage
Total 9 7 6 10
Weighted Factor Scoring Model
A weighted factor scoring model is when each of the relevant
factors selected by management is given numeric weights to reflect
the importance of each of them in the project.
The weights may be generated by any technique that is acceptable
to the organization’s policy makers.
Each project receives a score that is the weighted sum of its grade
on a list of criteria. Scoring models require:
agreement on criteria
agreement on weights for criteria
a score assigned for each criteria
Assessment Criteria Importance Weights
1. Payoff potential 4
2. Lack of risk 3
3. Safety 1
4. Competitive advantage 3
Criteria
A Payoff 12 4 8 12
Potential
Lack of Risk 3 6 6 9
Safety 3 2 1 2
Competitive 6 6 3 6
Advantage
Total 24 18 18 29
Project Selection Models: Profit/Profitability
 Payback Period
Average Rate of Return
Discounted Cash Flow
Internal Rate of Return
Profitability Index
Financial Appraisal of Project
Basic questions
 Is the project worthwhile financially (that is whether it will
generate sufficient cash flows to repay debt and produce a
satisfactory rate of return on investment)?
How to select the "best" project from a list of projects?
Most common measures

Net Present Value (NPV), Internal Rate of Return (IRR), Payback
Period, Return on Investment (ROI), Discounted Cash Flow.
project
management
Net Present Value (NPV)
 Calculate the present value of all future cash flows with the
discounting factor (MARR)
 Add all the present values of cash in-flows (cash revenues) and
subtract all the present values of cash out-flows (cash expenses)
 What we obtain is the Net Present Value or NPV
 Positive NPV means attractive financial return, and larger NPV
means more attractive project alternative.
NPV =
project
management
Internal Rate of Return (IRR)
 IRR is defined as the value of discount rate for which NPV

is exactly zero.The calculation should be carried out using
financial calculators or computer software (like Excel)
Larger IRR indicates that the project is more attractive financially.
NPV(IRR) = 0 =
project
management
Payback Period
 The amount of time required to recover the initial investment

that the sponsors inject in the project.
Unrecovered cost at start of year

Payback = Year before full recovery +
Cash flow during year
project
management
Problem#1
Compare following projects Based on NPV, IRR, and Payback Period

At 10% WACC
Net Cash Flow($)

Year Project S Project L
0 -1000 -1000
1 500 100
2 400 300
3 300 400
4 100 600
project
management
Comparing Projects With Unequal Lives
 Two projects with unequal lives are compared by replacement
chain approach or through Uniform Annual Equivalent method
Net Cash Flow($)

Year Project C Project F
0 -40000 -20000 Project has 11.5% WACC
1 8000 7000
2 14000 13000
3 13000 12000
4 12000
5 11000
6 12000
project
management
Assessment of Profitability Models
NPV B/c IRR PP ARR

Theoretical Consideration
1.Does the method consider all the Y Y Y N ?
cash flows?
2.Does the method discount cash Y Y N N N
flows at the opportunity cost of
funds?
3.Does the method satisfy the Y N N ? ?
principle of value additivity?
4.Does the method maximizes Y N N ? ?
shareholders’ wealth?
project
management
NPV B/c IRR PP ARR
Practical Consideration
1.Is the method simple? Y Y Y Y Y
2.Can the method be used with N N N Perhaps Y
limited information?
3.Does the method give a relative N Y Y N Y
measure?
project
management
Pros and Cons of Profitability Models
Advantages
Simple to use and understand
Use readily available data
Model output is familiar to decision makers
Allows taking absolute decisions
Some models account for project risk
project
management
Disadvantages
Ignore all momentary factors except risk
Some models Ignore the timing of the cash flows and time value of
money
Some models strongly biased toward short run
Pay back type models ignore cash flows beyond the payback period
The IRR model can result in multiple result
All are sensitive to errors in input data for the early years of project
All discounting models are non-linear, and the effects of changes in
the variables are generally not obvious to decision makers
All these models depend for input on a determination of cash flows
project
management
PVIF (k, n) Table
project
management
PVIFA (k, n) Table
project
management
FVIF (k, n) Table
project
management
FVIFA (k, n) Table
project
management

Presentation-on-Project-Selection Ne

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Presentation-on-Project-Selection Ne

Uploaded by

Copyright:

Available Formats

Presentation on Project Selection

 Managers often use decision-aiding models to extract the

 Models represent the problem’s structure and can be useful in

 Realism - reality of manager’s decision

 Models do not give any decision

 Partially represent the reality

 Sacred Cow - project is suggested by a senior and powerful

Unweighted 0-1 Factor Model

Unweighted Factor Scoring Model

Weighted Factor Scoring Model

Constrained Weighted Factor Scoring Model

Goal Programming with Multiple Objectives

Average Rate of Return

Discounted Cash Flow

Internal Rate of Return

Most common measures

 IRR is defined as the value of discount rate for which NPV

Larger IRR indicates that the project is more attractive financially.

 The amount of time required to recover the initial investment

Unrecovered cost at start of year

Compare following projects Based on NPV, IRR, and Payback Period

Net Cash Flow($)

Net Cash Flow($)

NPV B/c IRR PP ARR

You might also like