Project

Project Management
Management –– Project
Project Selection
Selection
Institute
Institute of
of Business
Business
Technology
Technology (BIZTEK)
(BIZTEK)
 How
How projects
projects start
start ??
• To fulfill a need

• To pursue an
• All Projects start opportunity

• To solve a problem
that poses a threat
 How
How Projects
Projects start?
start?

• Example – New accounts receivable system

• The two scenarios:
– The problem or need could be addressed in house
– May need outside agency for satisfying the need or
providing the solution
• If the problem could be solved in house the
person/ team/ division /department submits a
proposal
• When out side help is needed a Request For
Proposal (RFP) is prepared
 Sources
Sources of
of Project
Project Ideas
Ideas (Requests)
(Requests)
• Employees
• Departmental Managers
• Executives
• Top management
• Customers
• Competitors
• Government agencies
 Sources
Sources of
of Project
Project Ideas
Ideas (Requests)
(Requests)

• Shareholders
• Other stake holders
• Suppliers
• R&D
• Other sources
– General public
– Communities
• Environment scan – Henry Ford got the idea for
assembly line from ……..?
 From
From Needs
Needs recognition
recognition to
to Projects
Projects

• Recognize a need, problem, or opportunity

• Clearly define the problem or need
– ( Too much of scrap or rework in production process)
• Quantify the problem
– How significant
– Describe the problem in numbers
– Reduce the problem to monetary terms
 From
From Needs
Needs recognition
recognition to
to Projects
Projects
• Determine the budget
– Estimate how much the solution to the problem costs
• Prepare a request for proposal
– A written statement that includes the problem, the solution
and cost of solution
– Proposed benefits in monetary terms to the organization
• Select the project (s) with the greatest benefit to the
organization for the cost to be incurred
 Projects
Projects could
could be
be ….
….
• Bread-and-butter projects
– Involve evolutionary improvements to current products and
services.
• Pearls
– Represent revolutionary commercial advances using proven
technical advances.
• Oysters
– Involve technological breakthroughs with high commercial
payoffs.
• White elephants
– Projects that at one time showed promise but are no longer
viable.
Project
Project Portfolio
Portfolio Matrix
Matrix
 Categories
Categories of
of Projects
Projects

• Derivative Projects – only incrementally different

from existing projects. Usually replacements

• Platform Projects – Different from existing

projects Product/ service or both, Next generation

• Break through projects New technology projects

• R&D projects – Visionary

 Project
Project Proposal
Proposal
Contents
Contents

• Executive Summary
• Cover Letter
• Nature of the problem/ opportunity /need
• Plan for Implementation of Project
• Plan for Logistic Support & Administration of the
project
• Description of group proposing to do the work
• Any relevant past experience that can be
applied
 Developing
Developing the
the Concept
Concept into
into new
new product
product
development
development area
area

• Number of new ideas

• Screening of ideas to narrow down
• Filtered by
– Marketing assessment
– Financial assessment
– Strategic assessment
 Project
Project Selection
Selection

• Develop a set of criteria against which each

opportunity will be evaluated
• List the assumptions
• Gather data and information for each opportunity
• Evaluate each opportunity against the criteria
 Example:
Example: Criteria-
Criteria- New
New product
product
development
development

• Alignment with • Technology required

company goals • ROI
• Anticipated sales • Human Resources
volume • Competitor reaction
• Increase in market • Regulatory approval
share
• Time frame
• New markets
• Public reaction
• Anticipated retail price
• Investment required
 Feasibility
Feasibility Studies
Studies
• For all important and expensive projects
normally feasibility studies are conducted
• This involves gathering information and
evaluation
• Operational feasibility
• Technical feasibility
• Economic feasibility
 Operational
Operational feasibility
feasibility
• Is the project workable
• Does it provide the guarantees with regards to
performance.
• Support from stake holders
• Support from employees
• Support from Top management
 Technical
Technical feasibility
feasibility
• Availability of necessary technology
• Performance guarantees if available
• If not available by what stage of the project will
the technology available
 Economic
Economic feasibility
feasibility
• Cost of feasibility study
• Cost of projects
• Cost/ benefit analysis
• Tangible benefits and intangible benefits
 Project
Project Selection
Selection
• Evaluation process -- individual projects or
groups of projects
• Choosing some set of project options
• Organizational objectives achieved
• Managers use decision-aiding models
• Models represent the problem’s structure
• Models aid in evaluating risks and options
Project
Project Portfolio
Portfolio Process
Process
 Project
Project Portfolio
Portfolio Process
Process is
is …
…
• Selecting different projects that help the
organizational objectives
• Includes projects of all types Strategic,
Operational and other projects
 Project
Project Portfolio
Portfolio Process
Process –– Purpose
Purpose -- 11
• Identify Projects that Meet Strategic Needs
– Support Multiple Goals
– Direct Organizational Improvement
– Enhance/Enable Key Areas
• Prioritize Potential Projects
– Limit Active Projects to Manageable Level
– Identify Risk-intensive Efforts
– Balance Short, Medium, Long-term Returns
• Reduce Projects from Getting in via “Backdoor”
 Project
Project Portfolio
Portfolio Process
Process –– Purpose
Purpose -- 22
• Identify non projects
• Prioritize the projects basing on some criteria
• Limit the no of projects so that important ones
get resources and attention
• To select projects that support organizational
strategy and multiple organizational goals
• Eliminate projects that incur extra cost and /risk
• To keep from overloading organizational
resources
• Balance the resources with needs
• To balance short, medium and long term goals
 Managing
Managing the
the Portfolio
Portfolio
• Senior Management Input
– Provide guidance in selecting criteria that are aligned
with the organization’s goals
– Decide how to balance available resources among
current projects
• The Priority Team Responsibilities
– Publish the priority of every project
– Ensure that the project selection process is open and
free of power politics.
– Reassess the organization’s goals and priorities
– Evaluate the progress of current projects
 Project
Project Portfolio
Portfolio Process
Process –– Steps
Steps -1
-1

1. Establish a Project Management “Governance”

Structure
– Senior Leaders and Technical Experts
2. Identify (Common) Project Selection Criteria
– Tied to Strategic Vision, Mission, Goals, Objectives
3. Collect Project-specific Data
– Project Attributes Tied to Selection Criteria
4. Assess Available Resources
– Internal and External
– Financial and Other
 Project
Project Portfolio
Portfolio Process
Process –– Steps
Steps -- 22

5. Reduce Project and criteria List

- Screen for Potential “Differentiators”
6. Prioritize Projects within Categories
- Assuring Balance of Portfolio
- Avoid Overabundance of similar Projects
7. Select Primary and “Reserve” Projects
- Leave Budget for “Surprise” Opportunities
8. Implement the Project Process
- Communicate Results to Selectees and Non-selectees
- Fund Projects to Promised Levels
 Criteria
Criteria for
for Project
Project Selection
Selection Models
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
 Applying
Applying aa Selection
Selection Model
Model
• Project Classification
– Deciding how well a strategic or operations project fits
the organization’s strategy.
• Selecting a Model
– Applying a weighted scoring model to bring projects to
closer with the organization’s strategic goals.
• Reduces the number of wasteful projects
• Helps identify proper goals for projects
• Helps everyone involved understand how and why a project is
selected
Project
Project Selection
Selection Models
Models
Project
Project Screening
Screening
Process
Process

FIGURE 2.5
AA Portfolio
Portfolio Management
Management System
System -- Project
Project
Selection
Selection Criteria
Criteria

• Non-financial (Non-Numeric) Models

– Projects of strategic importance to the firm

• Financial Models
– Payback, Net Present Value (NPV), Internal Rate of
Return (IRR)

• Multi-Weighted Scoring Models

– Use several weighted selection criteria to evaluate
project proposals.
 Nonnumeric
Nonnumeric Models
Models

• Sacred Cow - project is suggested by a senior

and powerful official in the organization.
– “If you have chance please look into ….” type of
comments.
– Sacred because Maintained until successfully
completed or boss feels it’s a failure or boss changes.
 Nonnumeric
Nonnumeric Models
Models

• Operating Necessity - the project is

required to keep the system running
– Example - Thefts in storage or Effluent treatment

• Competitive Necessity - project is

necessary to sustain a competitive position
– Replacement of old machinery (plant)
 Nonnumeric
Nonnumeric Models
Models
• 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
• In Q-Sort model projects are divided into good, fair and poor
groups. Each group with 8 members.
• More than 8 then further divided into two more categories
Fair-plus and fair-minus
• All the projects are raked on merit ( can be by Individuals or
groups)
 Numeric
Numeric Models:
Models: Profit/Profitability
Profit/Profitability
• Payback period
– Initial fixed investment/estimated annual cash inflows
from the project
• Average Rate of Return
– Average annual profit/average investment
• Discounted Cash Flow
– Present Value Method
 Numeric
Numeric Models:
Models: Profit/Profitability
Profit/Profitability
• Internal Rate of Return
–Finds rate of return that equates present value
of inflows and outflows
• Profitability Index
– NPV of all future expected cash flows/initial
cash investment
 Financial
Financial Models
Models
• The Payback Model
– Measures the time it will take to recover the project
investment.
– Shorter paybacks are more desirable.
– Emphasizes cash flows, a key factor in business.
– Limitations of payback:
• Ignores the time value of money.
• Assumes cash inflows for the investment period (and not
beyond).
• Does not consider profitability.
Numeric
Numeric Model
Model (Profitability)
(Profitability) Payback
Payback Model
Model
• Pay back period (no of years) = Initial fixed
investment (Out flow) / Annual net cash inflows
• Example
– Project cost - $200,000
– Annual net cash inflows $50,000
– PB Period = $200000/50000 = 4years
• Assumes cash inflows will persist at least till
outflow is recovered
Numeric
Numeric Model
Model (Profitability)
(Profitability) Payback
Payback Model
Model

• Ignores cash flow beyond pay back period

• Takes into account risk
• The faster the pay back the lesser the risk is
• Widely used
• Emphasis on Cash Flow
Numeric
Numeric Model
Model (Profitability)
(Profitability) Average
Average Rate
Rate
of
of Return
Return (ARR)
(ARR)
• ARR = Average Annual profit (before or after
taxes)/ Initial or average investment
• Average annual profits $30000
• ARR = 30000/200000 = 0.15%
• Note - ARR is NOT reciprocal of PB period.
Average profit is not equal to cash inflows.
 Financial
Financial Selection
Selection Criteria
Criteria

• None of the above models are suitable for

critical evaluation as they do not take into
account Time value of money
• Time value of money
– Dollar received soon is more valuable than the
dollar received later, as this can be invested again.
– Money you have now is more valuable than the
money you receive later
– Then is 8 year investment better of than 5 year
investment ?
– Not necessary.
 Financial
Financial Selection
Selection Criteria
Criteria

– To see which Investment (return) is better the payoffs

have to be compared at the same point of time
(preferably at the time of investment), in today’s
dollars
– This is known as time value of money.
 Cash
Cash Flow
Flow line
line
• Helps us visualize when cash flows associated with a
particular project occur.
• It is a graphical representation used to show the timing
of cash flows.
• Time 0 is today. Shown as tick marks. Time 1 is one
period from today (end of one year and beginning of
second) and so on
• Usually one period is one year ( But not necessary)
 Cash
Cash Flow
Flow line
line
• Cash outflows are shown in minus and cash
inflows at the end f periods is positive
• $ signs are not shown to avoid clutter
• Can be used to find out future value or present
value
• Example $100 invested for 5 years @5% per
year (Next slide)
 Future
Future value
value
Time 0 1 2 3 4 5

Outflow -100 ? ? ? ? ?

Pres Int - 5.00 5.25 5.51 5.79 6.08

Prev Int - 0.00 5.00 10.25 15.76 21.55

Direction

Total 105 110.25 115.76 121.55 127.63

 Future
Future value
value
• Another method
• FV = $100 (1.o5)^5 = 127.63
• Can also calculate by using future value tables.
– FV5 = $100(FVIFi,n)
– * FVIF is Future value interest factor at i% rate and n
years
 Present
Present value
value
• PV = FVn (PVIFi,n)
• *PVIFin = (1/(1+i)^n) -- present value interest
factor for i (interest rate) and n (No of years)
• PV =FVn/ ((1+i)^n)
• In the above example
• PV = 127.63/ ((1+5)^5) = $100
 Net
Net Present
Present Value
Value (NPV)
(NPV)
• To correct the defect of non discounting
techniques like PB and ARR
• NPV relies on discounted cash flows
• In this method we find and sum the present
values of all the future cash flows a project
would generate and subtract its initial
investment to find the net
• If the net benefit considered is positive the
project is accepted, otherwise rejected.
 Net
Net Present
Present Value
Value (NPV)
(NPV)
• NPV = A0 + Sigma (t=0 to n) Ft/((1+k)t)
–Ft is cash inflow in period t
–K is the required rate of return
–A0 initial investment and hence
proceeded by minus sign
 Net
Net Present
Present Value
Value (NPV)
(NPV) with
with Inflation
Inflation
• If one takes into account inflation pt (predicted
rate of inflation during period t) the formula is
• NPV = A0 + Sigma (t=0 to n) Ft / (1+k +pt)t
 Net
Net Present
Present Value
Value

Time 0 1 2 3 4 K
=10%

Outflo -3000 1500 1200 800 300

w/Inflo
w
Pres - 1363.6 991.74 601.05 204.90
Value 4

Sum of 2838.6
Inflows 7

NPV -3000
+
2838.6
7=
161.33
 Internal
Internal Rate
Rate of
of Return
Return (IRR)
(IRR)
• IRR is the discount rate which equate the cash
out flows and inflows
• A0 + A1/(i+k) + A2/(i+k)2 + …. + An/(1+k)n =
R1/(i+k) + R2/(i+k)2 + …. + Rn/(1+k)n
• At expected cash outflow in period t, Rt expected
cash outflow in period t
• A0 is positive
 Discounted
Discounted models
models –– profitability
profitability index
index
• Benefit cost ratio
• PI = Sum of NPVs of all expected cash flows/
Initial Investment
• There are many other models
 Financial
Financial Models
Models (cont’d)
(cont’d)
• The Net Present Value (NPV) model
– Uses management’s minimum desired rate-of-return
(discount rate) to compute the present value of all net
cash inflows.
• Positive NPV: the project meets the minimum desired rate of
return and is eligible for further consideration.
• Negative NPV: project is rejected.
Net
NetPresent
PresentValue
Value(NPV)
(NPV)and
andInternal
InternalRate
Rateof
ofReturn
Return(IRR):
(IRR):
Example
ExampleComparing
ComparingTwo
TwoProjects
Projects

EXHIBIT 2.3
 Advantages
Advantages
• Simple to use
• Use readily available accounting data
• Output is familiar to Managers
• Allows absolute go/no go decisions
• Some account for risk
 Disadvantages
Disadvantages
• Ignore all nonmonetary factors
• Classical models ignore time value of money
• Strongly biased over short run
• Ignore cash flows beyond pay back period
• IRR can result in multiple solutions
• Sensitive to errors
 Numeric
Numeric Models:
Models: Scoring
Scoring
• These models overcome the disadvantages of
profitability models particularly of the “single
criteria”
• These models use multiple criteria.
• These models vary in complexity and
information requirements
 Numeric
Numeric Models:
Models: Scoring
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
Unweighted 0-1
0-1 Factor
Factor Model
Model

• A set of factors are selected by management

and listed in a printed form
• One or more raters (Senior mangers) are
selected by senior management basing on their
– Understanding of organizational goals
– Knowledge of firms project portfolio
• score each factor - yes (1) or No (0)
• Factor scores are summed up
 Unweighted
Unweighted 0-1
0-1 Factor
Factor Model
Model

• Projects with sufficient qualifying factors are

selected
• Advantage - use of multiple factors
• Disadvantages
– Assumes all criteria are of equal importance
– Allows for no gradation of degree to which the project
meets various criteria.
 Sample
Sample Project
Project evaluation
evaluation form
form
Project ______________
Rater ______________ Date _________

Qualifies Does Not

Profitability X
Market size X
Market share x
Etc __________________
Totals
 Unweighted
Unweighted Factor
Factor Scoring
Scoring Model
Model
• The second disadvantage of 0-1 model could be
over come constructing a simple scale for that
factor ( five point scale, Three point scale or Ten
point scale could be used)
• Profit
• above $100000-1
• 200000-2,
• 300000 -3,
• 400000 -4,
• 500000 -5 etc.
• Similarly for quality poor is 1, Satisfactory is 2,
Good is 3, Very good 4, Excellent 5.
 Unweighted
Unweighted Factor
Factor Scoring
Scoring Model
Model

• Colum scores are summed up

• Projects with scores that exceed some criteria
are selected.
 Sample
Sample Project
Project evaluation
evaluation form
form
Project ______________
Rater ______________ Date _________

Qualifies
Profitability 5
Market size 4
Market share 3
Etc _____2_____________
Totals 14
 Weighted
Weighted Factor
Factor Scoring
Scoring Model
Model
• Weights are given to
various factors based on
importance.
• The factor scores are
n


multiplied by the weights
and then summed up.
• Si = Sigma (j=1 to n) sij*wjj SijWij
– Where Si total score of ith
project
– Sij score of ith project for jth
j 1
factor
– Wj weight of jth factor.
 Weighted
Weighted Factor
Factor Scoring
Scoring Model
Model
• Weights could be generated by many methods.
Total of weights should be equal to 1.
• Most important technique is Delphi technique
developed by Rand corporation
• It is a technique for developing numeric values
for subjective , verbal measures.
• Temptation to include marginal criteria must be
avoided
Project
Project Screening
Screening Matrix
Matrix

FIGURE 2.3
Constrained
Constrained Weighted
Weighted Factor
Factor Scoring
Scoring Model
Model

• Takes into accounts the constraints also

• Avoids inclusion of marginal criteria.
• Example :
• Procter and Gamble would not consider a
project unless that :
– Can not be marketed nationally,
– Can not be distributed through mass outlets
– Can not provide potential market share of 50% etc
 Scoring
Scoring Models
Models Advantages
Advantages
• Allow multiple criteria
• Easy to use
• Direct reflection of managerial policy
• Easily altered to accommodate changes
• Allows that some factor is more important than
others
• Allows sensitivity analysis
 Scoring
Scoring Models
Models Disadvantages
Disadvantages
• Output a relative measure. Scores do not
represent the value
• Linear in form and elements are assumed to be
independent
• Ease of use facilitates inclusion of marginal
criteria with low weights
• Unweighted scores assume all factors are of
equal importance
PPP
PPP––Plan
Planof
ofRecord
Record
 Dealing
Dealing with
with Unapproved
Unapproved projects
projects

• Advise the person/team/division making the

proposal
• If project has merit place on waitlist
• To be considered at some future time.