PROJECT MANAGEMENT

Project Selection
 CONTENTS
• Projects with business strategy
• Definition of project selection
• Project selection conditions
• Project selection methods
 DEFINITION
• Project selection is the process of evaluating individual projects or groups of projects and
then choosing to implement a set of them so that the objectives of the parent organization are
achieved.
• Any project must pass approval process
• It must satisfy selection criteria
• Senior managers are the ones included in the process
 PROJECTS WITH BUSINESS
STRATEGY
• Projects requires resources
• Organisations cannot undertake most of the potential projects identified
because of resource limitations and other constraints.
• An organization’s overall mission and business strategy should guide the
project selection process and prioritization of those projects.
 SELECTION CONDITIONS
• Is the project potentially profitable?
• Is the project required by law or the rules of an industrial association; i.e., a “ mandate? ”
• Does the firm have, or can it easily acquire, the knowledge and skills to carry out the
project successfully?
• Does the project involve building competencies that are considered consistent with our firm
’ s strategic plan?
• Does the organization currently have the capacity to carry out the project on its proposed
schedule?
• In the case of R & D projects, if the project is technically successful, does it meet all
requirements to make it economically successful?
 Production

Marketing

Project selection
Financial
consideration

Personnel

Administration
Production Considerations
• Method of implementation
• Timeto be up and running
• Otherapplications ofthe system
• Learningcurve-time until the product is saleable
• Amountofdouble processing and waste
• Extentofoutside consultants required
• Cost ofpower requirements
• Interfacingequipmentrequired
• Period ofdisruption
• Safety ofsystem
Marketing Considerations

• Number of potential users

• Market share
• Time to achieve proposed market share
• Impact on current system
• Ability to control quality of information
• customer acceptance
• Estimated life of new system
• Spin-offs
• Enhanced image of company
• Extent of possible new markets.
Financial Considerations

• Cost of new system

• Impact on company cash-flow
• Borrowing requirement
• Time to break-even
• Payback period, NPV and IRR
• Size of investment required
• Cost of implementation
• Cost of training
• Cost of mistakes
• Level of financial risk.
Personnel Considerations

• Skills requirements and availability

• Trainingrequirements (technologytransfer)
• Employmentrequirements
• Level of resistance to change from current workforce
• Impact onworkingconditions
• Ergonomics, health and safety considerations
• Effecton internal communication
• Effect on job descriptions
• Effect on work unions
• Effect on morale
Administration and other Considerations

• Compliance with national and international standards

• Reaction from shareholders and other stakeholders
• Cost of maintenance contract
• Disaster recovery planning
• Cost of upgrading the system to keep pace with new technology
• Vulnerability of using a single supplier
• Customer service
• Effect of centralised databases
• Extent of computer literacy
• Legal considerations.
 Nonnumeric
Methods for
selecting projects
Numeric
 • The Sacred Cow
Nonnumeric • The Operating/Competitive Necessity
• Comparative Benefits
Selection • Balanced score card
• Time frame
Methods • Addressing problem or opportunity or
directive

Numeric • Payback period

• NPV
• Internal rate of return
Selection • Return on investment ROI
• Financial options/opportunity cost
Methods • Scoring methods
 • Compares cumulative costs to
Payback cumulative benefits
• Easiest to see in graphical format
Analysis • Time on horizontal axis, money on
vertical
PAYBACK ANALYSIS
 PAY BACK PERIOD
• The payback period for a project is the initial fixed investment in the project divided by
the estimated annual net cash inflows from the project.
• The ratio of these quantities is the number of years required for the project to return its
initial investment.
• The longer the payback period, the greater the risk to the firm
• if a project requires an investment of $100,000 and is expected to return a net cash inflow
of $25,000 each year, then the payback period is simply 100,000/25,000 = 4 years,
assuming the $25,000 annual inflow continues at least 4 years.
• However, it ignores the time value of money as well as any returns beyond the payback
period.
 RETURN ON INVESTMENT (ROI)
• Another popular investment appraisal technique that does look at the whole project is return
on investment (ROJ).
• This method first calculates the average annual profit, which is simply the project out lay
deducted from the total gains, divided by the number of years the investment will run.
• The profit is then converted into a percentage of the total outlay using the following
equations:
• Average Annual Profit = (Total gains)- (Total outlay)/
Number of years
• Return on investment = Average Annual Profit/ x 100/
Original investment 1
 EXAMPLE OF ROI
Using the machine selection project calculate the return on investment
 DISCOUNTED CASH FLOW
• The discounted cash flow method considers the time value of money, the inflation rate,
and the firm ’s return - on - investment (ROI) hurdle rate for projects.
• The annual cash inflows and outflows are collected and discounted to their net present
value (NPV) using the organization ’ s required rate of return (a.k.a. the hurdle rate or cut
off rate ).
USING NPV SELECT
 NPV CALCULATION
Rt
(1 + i)t
• t is the time of the cash flow
• Rt is the cash flow at time t
• i is the interest rate

• Apply the above formula to each annual inflow and

outflow of cash
• Add all terms together to get the NPV
 NET PRESENT VALUE ANALYSIS
• Considers the time value of money
• Costs for future years must be discounted to the present time
• Tangible benefits also discounted to the present time
• Must identify an appropriate discount rate
• Take risk into consideration
FORMULA
• Project A has an initial investment of $700,000 and projected cash inflows of $225,000 for 5
years.
• Project B has an initial investment of $400,000 and projected cash inflows of $110,000 for 5
year
 NPV ANALYSIS
If… It means… Then…
the investment would add value to the firm the project may be accepted
NPV > 0

the investment would subtract value from the the project should be rejected
NPV < 0 firm

the investment would neither gain nor lose indifferent in the decision
NPV = 0 value for the firm This project adds no monetary value.
Decision should be based on other criteria,
e.g., strategic positioning or other factors not
explicitly included in the calculation.
 COMPARING OPTIONS
Weighted Decision Matrix
Criteria Weight SJS Enterprises Game Access DVD Link
Educational 15% 90 0 0
Sports-related 15% 90 90 90
Secure payment 10% 90 50 50

(rows left out here—see textbook)

Weighted 100% 56 14.5 12.5

Project Scores
 RATE OF RETURN
(Total benefits – Total costs) / Total costs

• Can be used to compare different options

• Organization may have a minimum acceptable rate of
return for projects
PROJECT SORING MATRIX
 BALANCED SCORECARD
• 1. People and Learning:
• What resources, skills, training and support must staff have to work effectively?
• What organizational culture is conducive to strong people performance?
2. Process Perspective:
• What must we excel at in order to satisfy our customers?
• How do we meet their needs consistently?
3. Customer Perspective:
• How do we meet customer needs and exceed expectations?
• What do we want the community to say about us?
4. Stewardship Perspective:
• What resources are required to achieve the mission?
• How are revenue generating strategies balanced with expense management?
 ADDRESSING PROBLEMS,
OPPORTUNITIES, AND DIRECTIVES
• Another method for selecting projects is based on their response to a problem, an
opportunity, or a directive, as described in the following list:
• Problems are undesirable situations that prevent an organization from achieving its goals. These
problems can be current or anticipated. For example, if a bridge in a major city collapses, that
problem must be addressed as soon as possible.
• Opportunities are chances to improve the organization. For example, a company might want to
revamp its website or provide a booth at a conference to attract more customers.
• Directives are new requirements imposed by management, government, or some external
influence. For example, a college or university may have to meet a requirement to discontinue the
program