Presentation on Project Selection

1. Presentation on Project Selection www.AssignmentPoint.com

2. Project selection is the process of evaluating individual projects or groups of projects, and then choosing to implement some set of them so that the objectives of the parent organization will be achieved • Managers often use decision-aiding models to extract the relevant issues of a problem from the details in which the problem is embedded • Models represent the problem’s structure and can be useful in selecting and evaluating projects www.AssignmentPoint.com

3. Criteria of Project Selection 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 www.AssignmentPoint.com

4. Nature of Project Selection Models • Models do not give any decision • Partially represent the reality www.AssignmentPoint.com

5. Project Evaluation Factors • Production Factors • Marketing • Financial • Personnel • Administrative www.AssignmentPoint.com

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7. Project Selection Models:Non Numeric • Sacred Cow - project is suggested by a senior and powerful • official in the organization • Operating Necessity - the project is required to keep the system • running • Competitive Necessity - project is necessary to sustain a • competitive position • 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 www.AssignmentPoint.com

8. Project Selection Models: Scoring • Unweighted 0-1 Factor Model • Unweighted Factor Scoring Model • Weighted Factor Scoring Model • Constrained Weighted Factor Scoring Model • Goal Programming with Multiple Objectives www.AssignmentPoint.com

9. Unweighted 0-1 Factor Model • A set of relevant factors is selected by management and then • usually listed in a preprinted form. • One or more raters score the project on each factor, depending • whether or not it qualifies for an individual criterion. • The criteria for choices are: • A clear understanding of organizational goals • A good knowledge of the firm’s potential project portfolio • Advantage of this model is that it uses several criteria. • Disadvantages are that it assumes all criteria are of equal • importance and it allows for no gradation of the degree to which • a specific project meets the various criteria. www.AssignmentPoint.com

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11. Unweighted Factor Scoring Model • This model is used by constructing a simple linear measure of • the degree to which the project being evaluated meets each of the criteria. • Often a five-point scale is used to evaluate the project. • A variant of this selection process might choose the highest scoring • project. • The criteria are all assumed to be of equal importance. www.AssignmentPoint.com

12. High = 3 Medium = 2 Low = 1 www.AssignmentPoint.com

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14. Weighted Factor Scoring Model • A weighted factor scoring model is when each of the relevant • factors selected by management is given numeric weights to reflect • the importance of each of them in the project. • The weights may be generated by any technique that is acceptable • to the organization’s policy makers. • Each project receives a score that is the weighted sum of its grade • on a list of criteria. Scoring models require: • agreement on criteria • agreement on weights for criteria • a score assigned for each criteria www.AssignmentPoint.com

15. Assessment Criteria Importance Weights 1. Payoff potential 4 2. Lack of risk 3 3. Safety 1 4. Competitive advantage 3 www.AssignmentPoint.com

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17. Project Selection Models: Profit/Profitability • Payback Period • Average Rate of Return • Discounted Cash Flow • Internal Rate of Return • Profitability Index www.AssignmentPoint.com

18. Financial Appraisal of Project • Basic questions • Is the project worthwhile financially (that is whether it will generate sufficient cash flows to repay debt and produce a satisfactory rate of return on investment)? • How to select the "best" project from a list of projects? • Most common measures Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Return on Investment (ROI), Discounted Cash Flow. www.AssignmentPoint.com project management

19. Net Present Value (NPV) • Calculate the present value of all future cash flows with the discounting factor (MARR) • Add all the present values of cash in-flows (cash revenues) and subtract all the present values of cash out-flows (cash expenses) • What we obtain is the Net Present Value or NPV • Positive NPV means attractive financial return, and larger NPV means more attractive project alternative. NPV = www.AssignmentPoint.com project management

20. Internal Rate of Return (IRR) • IRR is defined as the value of discount rate for which NPV is exactly zero.The calculation should be carried out using financial calculators or computer software (like Excel) • Larger IRR indicates that the project is more attractive financially. NPV(IRR) = 0 = www.AssignmentPoint.com project management

21. Payback Period • The amount of time required to recover the initial investment that the sponsors inject in the project. Unrecovered cost at start of year Payback = Year before full recovery + Cash flow during year www.AssignmentPoint.com project management

22. Problem#1 Compare following projects Based on NPV, IRR, and Payback Period At 10% WACC www.AssignmentPoint.com project management

23. Comparing Projects With Unequal Lives • Two projects with unequal lives are compared by replacement • chain approach or through Uniform Annual Equivalent method Project has 11.5% WACC www.AssignmentPoint.com project management

24. Assessment of Profitability Models www.AssignmentPoint.com project management

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26. Pros and Cons of Profitability Models • Advantages • Simple to use and understand • Use readily available data • Model output is familiar to decision makers • Allows taking absolute decisions • Some models account for project risk www.AssignmentPoint.com project management

27. Disadvantages • Ignore all momentary factors except risk • Some models Ignore the timing of the cash flows and time value of money • Some models strongly biased toward short run • Pay back type models ignore cash flows beyond the payback period • The IRR model can result in multiple result • All are sensitive to errors in input data for the early years of project • All discounting models are non-linear, and the effects of changes in the variables are generally not obvious to decision makers • All these models depend for input on a determination of cash flows www.AssignmentPoint.com project management

28. PVIF (k, n) Table www.AssignmentPoint.com project management

29. PVIFA (k, n) Table www.AssignmentPoint.com project management

30. FVIF (k, n) Table www.AssignmentPoint.com project management

31. FVIFA (k, n) Table www.AssignmentPoint.com project management