Chapter 3- Project Selection.ppt 185r5p

Chapter 2: Project Selection

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Project Initiation: Strategic Planning and Project Selection • The first step in initiating projects is to look at the big picture or strategic plan of an organization • Strategic planning involves determining long-term business objectives • Projects should strategic and financial business objectives rozlin BPA 2092

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Project Selection • Process of evaluating project and then choosing to implement some set of them so that the objectives of the parent organization’s will be achieved.

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Criteria of Choice • Three important criteria for projects: – There is a need for the project – There are funds available – There’s a strong will to make the project succeed

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Project Evaluation Factors • Production factors (e.g. safety process) • Marketing factors (e.g. potential market) • Financial Factors (e.g. NPV) • Personnel Factors (e.g. labor skill requirements) • istrative Factors (e.g. government standard) rozlin BPA 2092

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Types of Project Selection Models 1. Nonnumeric models 2. Numeric models : Profit / Profitability

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Nonnumeric Models 1. The Sacred Cow – suggested by a senior and powerful official 2. The Operating Necessity 3. The Competitive Necessity 4. The Product Line Extension 5. Comparative Benefit Model

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Numeric Models 1. Payback period – compare by year of loan (total) 2. Rate of Return- by Rate of Cost (ROC) and Rate of Investment (ROI) 3. Discounted Cash Flow (NPV)- inflow by quarter times Present Value (PV)= 1/A; A = (1+i)-n 4. Profitability Index = net profit/cost 5. Scoring

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Net Present Value Analysis • Net present value (NPV) analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time • Projects with a positive NPV should be considered if financial value is a key criterion • The higher the NPV, the better

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Figure: Net Present Value Example

Excel file rozlin BPA 2092

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Return on Investment • Return on investment (ROI) is income divided by investment ROI = (total discounted benefits - total discounted costs) / discounted costs

• The higher the ROI, the better • Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects rozlin BPA 2092

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Payback Method • Another important financial consideration is payback analysis • The payback period is the amount of time it will take to recoup, in the form of net cash inflows, the net dollars invested in a project • Payback occurs when the cumulative discounted benefits and costs are greater than zero

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Figure: NPV, ROI, and Payback Analysis for Project 1

Excel file

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Weighted Scoring Model • A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria – First identify criteria important to the project selection process – Then assign weights (percentages) to each criterion so they add up to 100% – Then assign scores to each criterion for each project – Multiply the scores by the weights and get the total weighted scores

• The higher the weighted score, the better • See “What Went Right?” for a description of how a mortgage finance agency uses a weighted scoring model for projects. rozlin BPA 2092

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Figure: Sample Weighted Scoring Model for Project Selection

Excel file

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