Friday, October 8, 2010

Project Selection Method

Most organizations have a formal, or at least semi-formal, process for selecting and prioritizing projects. Selection methods measure the value of what the product, service, or result of the project will produce and how it will benefit the organization. Selection methods involve the types of concerns executive managers are typically thinking about. This includes factors such as market share, financial benefits, return on investment, customer retention and loyalty, and public perceptions.

There are generally two categories of selection methods: mathematical models (also known
as calculation methods) and benefit measurement methods (also known as decision models).
Decision models examine different criteria used in making decisions regarding project selection,
while calculation methods provide a way to calculate the value of the project, which is
then used in project selection decision making.

Mathematical Models
Mathematical models uses linear, dynamic, integer, nonlinear, and/or multi-objective programming in the form of algorithms or in other words, a specific set of steps to solve a particular problem. Organizations considering undertaking projects of enormous complexity might use mathematical modeling techniques to make decisions regarding these projects.

Benefit Measurement Methods
Benefit measurement methods employ various forms of analysis and comparative approaches to make project decisions.

The following are different types of the benefit measurement methods:

   Comparative Approaches 
  • Cost-Benefit Analysis, compares the cost to produce the product, service, or result of the project to the benefit that the organization will receive as a result of executing the project.
  • Scoring Models, decides on the criteria for example, profit potential, marketability of the product or service, ability of the company to quickly and easily produce the product or service, and so on. Each of these criteria is assigned a weight depending on its importance to the project committee. More important criteria should carry a higher weight than less important criteria.

   Benefit Contribution Methods
  • Cash Flow Analysis Techniques
    • Payback Period
      Payback period is the length of time it takes the company to recoup the initial costs of producing the product, service, or result of the project. This method compares the initial investment to the cash inflows expected over the life of the product, service, or result.
    • Discounted Cash Flows
      Discounted cash flow uses Present Value (PV) formula for selection purposes or when considering alternative ways of doing the project. It will select project with the highest investment to the company.
    • Net Present Value (NPV)
      The company expects to receive revenues, or cash inflows, from the resulting project. NPV allows you to calculate an accurate value for the project in today’s dollars. Projects with high returns early in the project are better projects than projects with lower returns early in the project.
    • Internal Rate of Return (IRR)
      IRR is the discount rate when the present value of the cash inflows equals the original investment. When choosing between projects or when choosing alternative methods of doing the project, projects with higher IRR values are generally considered better than projects with low IRR values.
  • Economic Models.
    Project selection based on the economic value among the projects.

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