TYPES OF PROJECT SELECTION MODELS

NON NUMERIC MODELS 1. The Sacred Cow In this case the project is suggested by a senior and powerful official in the organization. It could include: - Policies and procedures - How you train new and current employees - Hiring practices - Scheduled meetings - Work hours - Physical layout 2. The operating necessity It is becoming necessary in today's business life. It describes the act of planning and securing the necessary people and resource to plan, perform and deliver a project on time and on budget. This software is very useful because: To make your life working life more organized Structured In general easier

This software also allows the project manager 3. To monitor the work of subordinates Restrict in cost inefficiencies Ensure a successful completion of corporate initiatives Competitive Necessity

In this the decision made is based on the desire to maintain the companys competitive position in the market. 4. Product Line Extension: In this case, a project to develop and distribute new products would be judge on the degree to which it fits the firms existing product line Fills a gap Strengthens a weak line Extends the line in a new

Desirable direction fills a gap Strengthens a weak line Extends the line in a new, desirable direction.

Comparative Benefit Model: For this situation assume that an organization 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(a) Profitability (b) Scoring. a. PROFITABILITY: These are as followsPayback Period: The payback period for a project is the final initial fixed investment in the project divided by the estimated annual cash inflows from the project. The method has some merits and demerits: Merits: 1. It is easy to calculate 2. It is simple to understand 3. This method is an improvement over the APR approach Demerits: 1. It is completely ignores all cash flows after the payback period 2. This can be very misleading in the capital budgeting evaluations 3. It ignores time value of money 4. It considers only the recovery period as a whole b. Average Rate of Return: The ARR is the ratio of the average annual profit to the initial or average inve3stment in the project. This method has also some merits and demerits. Merits: 1. It is easy to calculate 2. It is simple to understand & use 3. Total benefits associated with the project are taken into account Demerits: 1. The earnings calculations ignore the reinvestment potential of a project benefits 2. It does not take into account the time value of money 3. This method does not take into consideration any benefits which can accrue to the firm form the sale. c. Net Present Value Method: It may be described as the summation of the PV of cash inflow in each year minus the summation of PV of new cash out flows in each year.

Merits: 1. It recognizes the time value of money 2. It considers total benefits arising out of the proposal over its lifetime 3. This method is useful for selection of mutually exclusive projects Demerits: 1. It is difficult to calculate 2. It is difficult to understand & use 3. This method does not give suitable results in care of two projects having different effective lives d. Internal Rate of Return: It is the rate of results that a project earns. It is defined as the discount rate (r) which makes NPV zero. Merits: 1. It considers time value of money 2. It is easier to understand 3. It takes into account the total cash inflows & outflows 4. It is consistent with the overall objective of maximizing shareholders wealth Demerits: 1. It involves tedious calculations & complicated computational problems 2. It produces multiple rates which can be confusing 3. The reinvestment rate assumption under IRR method is very unrealistic. e. Profitability Index: It is known as benefit- cost ratio, the PI is the net present value of all future expected cash flows divided by the initial cash investment. If this ratio is greater than 1.0, the project may be accepted. Merits: 1. It satisfies almost all the requirements of a sound investment criterion 2. It considers all the elements of capital budgeting such as- the time value of money, totally of benefits and so on 3. It is a sound method of capital budgeting Demerits: 1. It is more difficult to understand 2. It involves more computation than the traditional method (b) SCORING The scoring models are as follows a. Unweighted 0-1 Factor Model: A set of relevant factors is selected by management and usually listed in a preprinted form. One or more rates score the project on each factor, depending on whether or not it qualifies for an individual criterion. The raters are chosen by senior managers. b. Unweighted Factor Scoring Model: The disadvantage of unweighted 0-1 factor model helps to evaluate another model that is unweighted factor scoring model. Here the use of a discrete numeric scale to represent the degree to which a criterion is satisfied is widely accepted.

c. Weighted Factor Scoring Model: When numeric weights the relative importance of each individual factor are added, we have a weighted factor scoring model. Merits of Scoring Model: 1. These models allow multiple criteria to be used for evaluation & decision making, Including profit/profitability models and both tangible and intangible criteria. 2. They are structurally simple and therefore easy to understand and use. 3. They are a direct reflection of managerial policy. 4. They are easily altered to accommodate changes in the environment or managerial Policies. 5. Weighted scoring models allow for the fact that some criteria are more important than others. 6. These models allow easy sensitivity analysis. The trade-offs between the several criteria are readily observable. Demerits of Scoring Model: 1. The output of a scoring model is strictly a relative measure. Project scores do not represent the value or utility associated with a project and thus do not directly indicate whether or not the project should be supported. 2. In general, scoring models are linear in form and the elements of such models are assumed to be independent. 3. The case of use of these models is conducive to the inclusion of a large number of criteria which may have a very little impact on the total project impact. 4. Unweighted scoring models assume all criteria are of equal importance, which is almost certainly contrary to fact. 5. To the extent that profit/profitability is included as an element in the scoring model