PROJECT

SELECTION

By
A.Khaliq.KIHE
Project Management Chapter 02
Why Project Selection ??
There are many projects that fall outside
the organizations stated mission;
There are many projects being conducted

that are completely unrelated to the

strategy and goals of the organization;
and
There are many projects with funding

levels that are excessive relative to their

expected benefits.
Project Selection
Project selection is the process of
evaluating individual projects or groups
of projects, and then choosing one or a
set of them for implementation, so that
the objectives of the organization will be
achieved.
This same systematic process can be
applied to any area of the organizations
business in which choices must be made
between competing alternatives
Project Selection
For example,
a manufacturing firm can use evaluation/selection

techniques to choose which machine to adopt in a

part-fabrication process;
a TV station can select which of several

syndicated comedy shows to rerun in its 7:30 P.M.

weekday time-slot;
a construction firm can select the best subset of a

large group of potential projects on which to bid;

or a hospital can find the best mix of psychiatric,

orthopedic, obstetric, and other beds for a new

wing.
Project Selection

Managers often use project

selection models to extract the
relevant issues from the areas in
which the project is to be
implemented
Models represent the problems
structure and can be useful in
selecting and evaluating projects
Criteria for Project Selection
Models
Most important job in project
management is the identification of a
proper project selection model.
Factors that help a project manager in
the identification of an effective model.
(Project selection models are discussed
Ease of Use
next)
Cost
Realism
Easy
Capability
Factors of effective
Model
Realism - reality of managers
decision situation. Including the
factors that reflect the projects risks
like technical risk of performance,
time, cost as well as the market risk
of customers rejection and other
related risks.
Factors of effective
Model
Capability- able to be applicable in
different situations both internal and
external to the project and optimize the
decision. (e.g Strikes, Interest rate changes)
Flexibility it should be easily adjustable

in response to the changes in the firms

environment. (e.g tax laws change, new
technological advancements alter risk
levels)
Factors of effective
Model
Ease of Use - reasonably convenient,
easily implementable and
understandable.
Cost the cost of data
management(collection and
interpretation) and operating the model
should be less
Easy Computerization the project
operations and procedures should be
Nature of Project Selection
Models
There are two basic types of project
selection models. Both are widely used.
Some companies use a combination of
both.
Two Basic Types of Models
Numeric

As the name indicates uses numbers

and numerical calculations for
evaluating a project.
Non-numeric
Note !!
Two Critical Facts:
Models do not make decisions - People
do!
Models just guides the manager in
decision making but project manager
is the decision maker. PM can delegate
the decision making authority to
someone else as well.
All models, however sophisticated, are
only partial representations of the
Numeric Models: Profit/Profitability

Payback Period
Net Present Value
Profitability Index
 Payback Period

Payback period The period of time in which the

project will pay back the initial investment
amount.

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 repay its initial fixed
investment.

PBP= Initial Investment / Annual net Cash

inflows
 Payback Period

For example, assume a project costs

$100,000 to implement and has
annual net cash inflows of $25,000.
Then

Payback period = $100,000 /

$25,000
= 4 years
 Pay Back Period

0 1 2 3 4 5
-100 K 25 K 25 K 25 K 25 K 25 K

PBP is the period of time required

for the cumulative expected cash
flows from an investment project to
equal the initial cash outflow.
 PBP Acceptance Criteria

The management of XYZ has set a

maximum PBP of 5 years for
projects of this type.

Should this project be accepted?

Yes! The firm will receive back the
initial cash outlay in less than 5
years.
[4 Years < 5 Year Max.]
 Net Present Value
(NPV)
Net Present Value (NPV) The net
value of an investment projects future cash
flows. It is the value of the project that an
organization gains just after getting the
investment project.
The NPV of a project is calculated using the
formulaCFgiven
1 CF
below;
2
NPV = + +2 ... - Investment
CF
(1+k)
n 1
(1+k)+
(1+k)n

Where K is the required rate of return,

normally it is similar to the interest rate in
 Net Present Value
(NPV)
For example, assume a project costs
$100,000 to implement and has
determined that the appropriate discount
rate (k) for this project is 18 %. Then
$25,000 $25,000 $25,000
NPV = + + +
(1.18)1 (1.18)2 (1.18)3
$25,000 - $ 100,000
(1.18)4
NPV = $1939
 NPV Acceptance
Criteria

The management of XYZ has

determined that the required rate
is 18% for projects of this type.
Should this project be accepted?

YES! The NPV is positive. This means

that the project is increasing
shareholder wealth. [Accept as NPV
>0]
Profitability Index (PI)

Profitability Index Profitability Index

shows the rate of profit. We simply can
find out this rate in percentage.
We can calculate the profitability index
(PI) of a project using the following
formula.
PI = 1 + [ NPV / Initial investment ]
PI Acceptance Criteria

PI = 1 + $ 1939 / $100,000
= 1.019

Should this project be accepted?

YES! The PI is more than 1.00. This

means that the project is profitable.
[Accept as PI > 1.00 ]
 Nonnumeric Models
Sacred Cow - project is suggested by a senior and
powerful official in the organization. Normally such
projects start with a statement. The immediate result of
the statement is the creation of a project. For example
NSP projects.
Operating Necessity - the project is required to
keep the system running. For example a flood is
threatening the plant, the project of building a protective
wall does not require much formal evaluation. But to
keep the project operational the question is that: Is the
plant worth saving at the estimated cost?
Competitive Necessity - project is necessary to
sustain a competitive position.
Nonnumeric Models

Product Line Extension - projects are

selected to increase the current product
line, fill a gap, strengthen a weakness, or
extend the line in a way that the company
needs.

Comparative Benefit Model - several

projects are considered and their benefits
are considered then the one with the most
benefits is selected
Risk in project decisions

Risk - when the decision maker knows

the probability (chances) of each and
every state of nature and other thus
each and every outcome. An expected
value of each alternative action can be
determined
Uncertainty - when a decision maker
has information that is not complete
and therefore cannot determine the
exact value of each alternative
Project Risk
Project risk is an undecided event or
condition that, if it occurs, has a positive or
negative effect on at least one project
objective, such as time, cost, scope, or
quality.
A team involved in uncertainty assessment
typically gathers data and brainstorms
possibilities, considers root causes,
assesses likelihoods, envisions outcomes,
considers risk preferences, selects relevant
uncertainties, develops strategies, assigns
responsibilities, and finds ways to monitor
 Sources of Risk

Risk Source Unfavorable Risk Favorable Risk

Financial
Financial
conditions inside
conditions inside
or outside the
or outside the
organization that
Financial Risk organization that
could potentially
could enhance
threaten the
the viability of
success of the
the project.
project.
 Sources of Risk

Risk Source Unfavorable Risk Favorable Risk

A possible
A possible
technical
technical
breakthrough
challenge that
that could alter
Technical could alter the the course of the
course of the
project in a
project in a
positive
negative way
way.
Sources of Risk

Risk Source Unfavorable Risk Favorable Risk

A possible A possible
market, political, market, political,
or regulatory or regulatory
Business condition that condition that
Environm could could
ent make the project make project
outcomes less outcomes more
attractive than attractive than
anticipated anticipated.
 Sources of Risk

Risk Source Unfavorable Risk Favorable Risk

A project Unexpected
challenge support for the
associated with project from a
potential stakeholder
stakeholder group that might
Social interference in the help the project
project. advance.
Stakeholders can Stakeholders can
be inside or be inside or
outside the outside the
organization. organization.
Sources of Risk

Risk Source Unfavorable Risk Favorable Risk

Acts of nature
Acts of nature
such as the
such as disease
spontaneous
epidemics,
end of a disease
floods,
epidemic,
earthquakes,
External/ changes in
tornadoes,
weather
Natural weather
patterns, or
Environm patterns, or
favorable tidal
ent oceanic
phenomena that
circumstances
can make the
that can
project
have a negative
unexpectedly