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Chapter 2: Project Selection

rozlin BPA 2092

Project Initiation: Strategic Planning and Project Selection The first step in initiating projects is to look at the big picture or strategic plan of an organization Strategic planning involves determining long-term business objectives Projects should support strategic and financial business objectives
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Project Selection
Process of evaluating project and then choosing to implement some set of them so that the objectives of the parent organizations will be achieved.

rozlin BPA 2092

Criteria of Choice
Three important criteria for projects:
There is a need for the project There are funds available Theres a strong will to make the project succeed

rozlin BPA 2092

Project Evaluation Factors


Production factors (e.g. safety process) Marketing factors (e.g. potential market) Financial Factors (e.g. NPV) Personnel Factors (e.g. labor skill requirements) Administrative Factors (e.g. government standard)
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Types of Project Selection Models


1. Nonnumeric models 2. Numeric models : Profit / Profitability

rozlin BPA 2092

Nonnumeric Models
1. The Sacred Cow suggested by a senior and powerful official 2. The Operating Necessity 3. The Competitive Necessity 4. The Product Line Extension 5. Comparative Benefit Model

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Numeric Models
1. Payback period compare by year of loan (total) 2. Rate of Return- by Rate of Cost (ROC) and Rate of Investment (ROI) 3. Discounted Cash Flow (NPV)- inflow by quarter times Present Value (PV)= 1/A; A = (1+i)-n 4. Profitability Index = net profit/cost 5. Scoring

rozlin BPA 2092

Net Present Value Analysis


Net present value (NPV) analysis is a method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time Projects with a positive NPV should be considered if financial value is a key criterion The higher the NPV, the better

rozlin BPA 2092

Figure: Net Present Value Example

Excel file
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Return on Investment
Return on investment (ROI) is income divided by investment The higher the ROI, the better Many organizations have a required rate of return or minimum acceptable rate of return on investment for projects
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ROI = (total discounted benefits - total discounted costs) / discounted costs

Payback Method
Another important financial consideration is payback analysis The payback period is the amount of time it will take to recoup, in the form of net cash inflows, the net dollars invested in a project Payback occurs when the cumulative discounted benefits and costs are greater than zero

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Figure: NPV, ROI, and Payback Analysis for Project 1

Excel file

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Weighted Scoring Model


A weighted scoring model is a tool that provides a systematic process for selecting projects based on many criteria
First identify criteria important to the project selection process Then assign weights (percentages) to each criterion so they add up to 100% Then assign scores to each criterion for each project Multiply the scores by the weights and get the total weighted scores

The higher the weighted score, the better See What Went Right? for a description of how a mortgage finance agency uses a weighted scoring model for projects.
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Figure: Sample Weighted Scoring Model for Project Selection

Excel file

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