Project Selection Methods: Choose the best Project

Project Selection Methods - pmvidya

What is Project Selection Method?

Project Selection Method is a process of selecting which project to initiate from among many possible choices.

Different Project Selection Methods

There are 2 categories of methods to select projects

  1. Benefit Measurement Methods (Comparative Approach)
  2. Constrained Optimization Methods (Mathematical Approach)

Benefit Measurement Methods (Comparative Approach)

  1. Murder Board
  2. Peer Review
  3. Scoring Models
  4. Economic Models
    • Net Present Value (NPV)
    • Internal rate of return (IRR)
    • Pay-Back period
    • Cost Benefit Analysis

Constrained Optimization Methods (Mathematical Approach) 

  1. Linear Programming
  2. Non-Linear Programming
  3. Integer Programming
  4. Dynamic Programming
  5. Multi-Objective Programming

Benefit Measurement Methods

Murder Board

Murder Board is a panel of people who scrutinize any new project to find reasons why the project should not be selected for initiation and be killed. Projects which pass this intense scrutiny will be selected for initiation. Murder Board panel consists of Senior Managers, Subject Matter Experts etc., from different areas.

Peer Review

This is a Project Selection method that is used to evaluate projects based on the perspective of similar people in an organization.

Scoring Models

Every organization has its own objectives that needs to be achieved for them to care to initiate and execute a project. Now, in a Scoring Model method of project selection, the project selection committee will list a few relevant criteria and weigh them according to their importance. Then, each project is analyzed and assigned points for each of these criteria. Finally, all the points are added to get the final score. The project that gets the highest score is selected for initiation.

Net Present Value (NPV)

NPV gives us the today’s value of the sum of all transactions (inbound and outbound) that will happen in future.

Net Present Value is the difference between the project’s current value of cash inflow and the current value of cash outflow. The NPV must always be positive.

When picking a project, one with a higher NPV is preferred.

The advantage of considering the NPV over the Payback Period is that it takes into consideration the future value of money.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) gives us how much percent of the investment will turn back as revenue in future.

IRR is the interest rate at which the Net Present Value is zero—attained when the present value of outflow is equal to the present value of inflow. Internal Rate of Return is defined as the “annualized effective compounded return rate” or the “discount rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero.”

The IRR is used to select the project with the best profitability; when picking a project, the one with the higher IRR is chosen. When using the IRR as the project selection criteria, organizations should remember not to use this exclusively to judge the worth of a project; a project with a lower IRR might have a higher NPV and, assuming there is no capital constraint, the project with the higher NPV should be chosen as this increases the shareholders’ profits.

Pay-Back Period

Pay-Back Period is the time required to recover the cost invested in the project. If all other parameters are same, the the project with the least pay-back period will be selected.

Cost- Benefit Analysis

For any project to be considered for selection, Benefits from the project should be more than the cost invested in the project.

A ratio of benefits to cost (BCR) should be more than 1. Higher the BCR, better the opportunity.

Economic Value Added (EVA)

EVA is to see of the project is profitable after deducting all cost of capital. Because then only there is economic value add in the project.

Opportunity Cost

When there are multiple Options and each option has their own benefits, then Opportunity cost is the cost of the benefits we give up by choosing one option over another.

Constrained Optimization Methods

Linear Programming

This programming method involves bringing down the cost of the project through reduction of the time required to complete it.

Nonlinear Programming

Nonlinear Programming aims at solving optimization problems within projects wherein some of the constraints or functions are nonlinear.

Integer Programming

This method focuses on integer values rather than fractional ones. Some products, like tables for example, can never be fractional.

Dynamic Programming

This method involves simplifying a complex problem by separating it into a number of simpler problems.

Multiple Objective Programming

The Multiple Objective Programming approach focuses on making a decision for a number of problems using mathematical optimization.

Role of Project Manager in Project Selection

Project Manager (PM) is typically not involved in Project selection. PM is typically assigned to the project in the Initiation phase after the Project charter is signed. However, the Project selection process and the past projects executed by the organization can influence how a PM would plan and manage his project.

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