Criteria for Project Selection

1. Technological innovation The project should establish its technology, feasibility

and innovation.

2. Patentability The projects innovation should be patentable and free to operate.

3. Maret needs and business potential The project should address a substantial
!aret need for "hich there is no good or sufficient solution.
#. $bility to reach !ilestones "ithin budget and ti!e fra!e The project should
be able to fit into the t"o !ost i!portant fra!es of %ncubator operation& a t"o'year incubator
period and a pre'deter!ined budget.
(. )ualified and co!petent tea! Project operation in the %ncubator is done through a
true partnership bet"een the entrepreneur and Targetechs investing partners
Types of Project Selection Models
There are two types of project selection models
nonnumeric models
Numeric models.
Non-numeric models:
Does not use numbers as input for decision making. The types of non-numeric models are;
T he Sacred Cow
!n this case the project is suggested by a senior or powerful official in the organi"ation. The
project is sacred in the sense that it will be maintained until successfully concluded# or until the
boss# personally# recogni"es the idea as a failure and terminates it.
T he $perating Necessity
!f a flood is threatening the plant# a project to build a protecti%e dike does not re&uire
much formal e%aluation# in an e'ample of this scenario.
T he Competiti%e Necessity
(lthough the planning process for the project was &uite sophisticated# the decision to
undertake the project was based on a desire to maintain the company)s competiti%e
position in the market.
*roduct +ine ,'tension
!n this case# a project to de%elop and distribute new products would be judge on the
degree to which it fits the firm)s e'isting product line# fills a gap# strengthens a weak line#
or e'tends the line in a new# desirable direction.
Comparati%e -enefit .odel
/or this situation assume that an organi"ation has many projects to consider. Senior
manager would like to select a subset of the project that would most benefit the firm# but the
projects do not seem to be easily comparable.
Numeric Models:

Numeric models are classified into two heads these are namely-
*rofitability
Scoring
*rofitability
!n this process checks only single criteria# i.e. financial appraisal of the project. These are as
follows
*ayback period
The payback period for a project is the final initial fi'ed in%estment in the project di%ided by the
estimated annual cash inflows from the project. The method has some merits and demerits
.erits
0. ! t is easy to calculate
1. ! t is simple to understand
2. This method is an impro%ement o%er the (*3 approach
Demerits
0. ! t is completely ignores all cash flows after the payback period
1. This can be %ery misleading in the capital budgeting e%aluations
2. ! t ignores time %alue of money
4. ! t considers only the reco%ery period as a whole
(%erage 3ate of 3eturn
The (33 is the ratio of the a%erage annual profit to the initial or a%erage in%estment in the
project. This method has also some merits and demerits.
.erits
0. ! t is easy to calculate
1. ! t is simple to understand 5 use
2. Total benefits associated with the project are taken into account
Demerits
0. The earnings calculations ignore the rein%estment potential of a project benefits
1. !t does not take into account the time %alue of money
2. This method does not take into consideration any benefit its which can accrue to
the firm forms the sale
Net *resent 6alue .ethod
! t may be described as the summation of t he *6 of cash inflow in each year minus the
summation of *6 of new cash out f lows in each year.
.erits
0. ! t recogni"es the time %alue of money
1. !t considers total benefits arising out of the proposal o%er its lifetime
2. This method is useful for selection of mutually e'clusi%e projects
Demerits
0. !t is difficult to calculate
1. ! t is difficult to understand 5 use
2. This method does not gi%e suitable results in care of two projects ha%ing different effecti%e li%es
!nternal 3ate of 3eturn
!t is the rate of results that a project earns. !t is defined as the discount rate 7r8 which
makes N*6 "ero.
.erits
0. !t considers time %alue of money
1. ! t is easier to understand
2. !t takes into account the total cash inflows 5 outflows
4. ! t is consistent with the o%erall objecti%e of ma'imi"ing shareholder)s wealth
Demerits
0. ! t in%ol%es tedious calculations 5 complicated computational problems
1. ! t produces multiple rates which can be conf using
2. The rein%estment rate assumption under ! 33 method is %ery unrealistic
*rofitability !nde'
!t is known as benefit- cost ratio# the *! is the net present %alue of all future e'pected cash
flows di%ided by the initial cash in%estment. ! f this ratio is greater than 0.9# the project may be
accepted.
.erits
0. !t satisfies almost all the re&uirements of a sound in%estment criterion
1. ! t considers all the elements of capital budgeting such as- the time %alue of
money# totally of benefits and so on
2. ! t is a sound method of capital budgeting
Demerits
0. ! t is more difficult to understand
1. !t in%ol%es more computation than the traditional method

Scoring :
The scoring models are as follows-
:nweighted 9-0 /actor .odel
( set of rele%ant factors is selected by management and usually listed in a preprinted form.
:n-weighted /actor Scoring .odel
The disad%antage of unweighted 9-0 factor model helps to e%aluate another model that is un-
weighted factor scoring model.
;eighted /actor Scoring .odel
;hen numeric weights the relati%e importance of each indi%idual f actor are added# we
ha%e a weighted f actor scoring model.
Demerits of Scoring .odel
.The output of a scoring model is strictly a relati%e measure. *roject scores do not represent the
%alue or utility associated with a project and thus do not directly indicate whether or not the
project should be supported.