|written 14 months ago by||• modified 14 months ago|
|written 14 months ago by||• modified 14 months ago|
The selection of projects is an important part of the business. Project selection models help the project manager in selecting a project.
Thus there are two types of project selection models that are used to select the projects:
1) Non-Numeric Project Selection Models: Non-Numeric project selection models use discussions and suggestions as input for selecting a project. Non-numeric selection methods include techniques that are not based on quantitative techniques. These models are constructed on the basis of subjective evaluation of the ideas and opinions of the project manager and the project team.
Non – Numeric project selection models have 6 types:
The Sacred Cow: The senior and the powerful official in the company suggest the project in this case. Here the project is simply initiated from an apparent opportunity or chance which follows an un-established idea for a new product, for the designing & adoption of the latest information system with universal database, for the establishment of a new market or for some other category of project that demands the investment of the resources of the organization. The project will continue untill it ends or the boss himself announces project termination.
Q-Sort Model: It is one of the best techniques for ordering projects. Q-sort model helps in preparing a list of projects that are on priority. In this technique, the project manager gathers the ideas of the project and then classifies them as good, fair or bad. The classification of the project is done on the basis of the market potential, economic and technical feasibility, risks involved and the level of competition.
Product Line Extension: In product line extension, a project considered for development & distribution of new products will be evaluated on the basis of the extent to which it suits the company’s current product lines, fortify a weak line, fills a gap, or enhanced the line in a new & desirable direction.
Comparative Benefit Model: According to this selection model, there are several projects that are being considered by the organization. These subset of the projects that are selected by the senior management of the organization can provide the most benefits to the company. But comparing various projects is not an easy task.
The concept of comparative benefit is enormously used for selection decisions of project. And it is upto the selection committee members to select a project that will benefit the company more than the others even they lack the suitable way to specify or measure the proposed benefit.
- Competitive Necessity: Competitive necessity is the urge to keep the competitive position of the company in the market provide a basis for making such a decision to carry on the project. Therefore certain undergraduate and Master in Business Administration (MBA) programs are restructured in the offerings of many universities to keep their competitive position in the academic market.
More priority is given to operating necessity projects over competitive necessity projects regarding investment related issues. But both of these types of project selection models are considered much useful & effective as compared to other select models.
- Operating Necessity: Operating Necessity is very important above all. Many questions come in front of the project that it is needed in order to keep the system functioning like is the estimated cost of the project is effective for the system or not. If the answer is yes, then the project costs should be analyzed to ensure that these are maintained as the minimum and compatible with the success of the project.
2) Numeric Project Selection Models: Organizations depend on numeric models heavily while selecting a project Most firms consider the numeric models more useful tha the non-numeric models.
Different Numeric Models for project selection are as follows:
- Payback Period: The payback period represents the time the project takes to return the money spent on the project.
Payback period is calculated from the following formula:
Cost of the project / Annual cash inflow from the project
This method also functions as an inadequate representative for the risk. The company faces less risk when it recovers the initial investment fast.
- Average Rate of Return: ARR is used for calculating the return on investment.
Formula to calculate Average Rate Of Return:
(Annual cash Inflows – Depreciation) / Initial Investment
- Discounted Cash Flow: Discounted cash flow method is also called the Net Present Value (NPV) method. The net present value of all cash flows is determined by discounting them by the required rate of return in this method.
NPV ═ Total present value of cash Inflows – Present value of initial investment
- Internal Rate of Return (IRR): Internal Rate of Return of an investment is the discount rate at which the net present value of costs of the investment equals the net present value of the benefits of the investment. In this method, the cash flows of a project are discounted at a suitable rate by hit and trial method, which equates the net present value so calculated to the amount of the investment.
C = A1/(1+r)b + A2/(1+r)b + An/(1+r)n
- Profitability Index: The profitability index is net present value of all future expected cash flows divided by the initial investment. The profitability index is also called the benefit-cost ratio.
Profitability index = PV of future cash flow / Initial Investment