Information Sheet Pn-2.1.1 "Strategic Management and Project Selection" Objectives
Information Sheet Pn-2.1.1 "Strategic Management and Project Selection" Objectives
Objectives:
At the end of this chapter, the learner will be able to:
Strategy is decision how the organization will complete it rivals in the industry where it
is participating. A project converts strategy into a new product, service, and process.
Hence, it is vital for the success of a project to be parallel with strategic goals of the
organization. A strong link to the organization’s strategy is a must for every project. The
project manager should therefore have a very good understanding of strategy and
mission being implemented by the organization.
How to tie a project or a group project more strongly to the organization’s goals and
strategy, how to manage the increasing quantity of ongoing project and how to create
there projects successfully are there challenges being faced by modern-day
organizations. Managing the growing figure of ongoing project and completing them
more fruitfully are the objectives relating to project management maturity.
Illustrated in a pyramid format see in (figure 2) is a generic model that show progression
in project management maturity. The project model maturity reflects that maturity is a
continuous process of improvement via identifiable incremental steps.
Project selection is the process of appraising a project and groups of projects and
afterward deciding to execute some of them. In order to realize the objective or
organization. It is first process to apprises each project proposal and decide on the
premier priority project/s for more analysis. Usually stakeholder who would benefits
from project, management and the project manager are part of the project selection
process. Project selection process/s evaluate and prioritizing projects, selection and
initiation of projects and review of projects (see Figure 3).
The first step calls for the naming if the project concepts or idea with a written brief
description of each project. In the second step each project is evaluated using different
criteria and models and the outcomes become the basis for prioritization. Project
selection and initiation is the step that logically follows evaluation and prioritization
focusing mainly on the delicate decision of staffing the project teams. After project
selection a regular review of project/s is imperative to find out if they are still in-line
with strategy of the firm. One way of checking is to repeat the preliminary evaluation
with more precise estimates as they become accessible. Another way of evaluating is to
hold regular project management review meeting to spot key problems on a per-project
basis, using project status reports.
There is diverse project selection model used by modern business organization. Two
widely-used basic types of models for project selection and nonnumeric and numeric. As
name suggestion nonnumeric models do not utilize numbers as inputs (see Table 3).
These models older and simple. Numeric model makes use of number to measure both
objective and subjective criteria (see table 4). Sometimes a combination of the two is
used by organization.
When a firm choose a project selection model, the following criteria development by
Shoulder (Meredith & Mantel, 2012) are the most significant:
1. Realism – the model should mirror the reality of the manager’s decision situation
together with various objectives of both the firm and its managers; it should take
into consideration the realities of the firm’s limitations on facilities, capital
human resources, technology and so forth; it includes factors that reveal project
risk, including the technical risks of performance, cost, and time as well as the
market risks of customer rejection and other implementation risks.
3. Flexibility – the model should offer convincing outcome among the condition
that the firm may experience; it should have the ability to be effortlessly modified
or to be self-adjusting, in answer to changes in the firm’s environment like tax
laws change, new technological advancements alter risk levels, and a change
organization’s goals.
4. Ease of Used – the model should be realistically convenient, not require a long
time to carry out, and be simple to employ and comprehend; it must not need
out of the ordinary explanation, data that are hard to obtain, unnecessary
personnel, or out of stock equipment.
5. Cost – the data gathering and modeling cost should be low in relation to the cost
of the project and must certainly be less than the probable benefits of the
project.
6. Easy Computerization - the data gathering and modeling cost should be simple
and suitable to collect and accumulate the information in a computer database,
and to maneuver data in the model by using a commonly accessible, standard
computer packages programs, similar simplicity and handiness should relate to
moving the information to any standard decision support system.
NUMBER MODELS OF PROJECT SELECTION
PAYBACK PERIOD
Formula:
1. Let’s calculate the payback period for project A. in year 0 (today) we have INITIAL
INVESTMENT IS: (1000) means negative or CASH OUTFLOW.
2. Over the course of the project we have 1600 worth of benefits (cash inflows) in
total.
3. Slip evenly for 4 years of 400 each.
4. To calculate:
a. 400 (1 year) + 400 (2 years) + 200 (6 months of year 3) = 1000
Example 2: What if we have multiple project in our company that we need to force
rank? And we have only 1000 of investment money to spend, which project is
(financially speaking) the most attractive.
1. In total, for the full 4 years combined, each of the three projects has 1600 worth
of cumulative benefits, but the timing of these benefits varies.
2. To solved which is better to pursues Payback method could help.
a. Project A = 2.5 years (400+400+200) =1000
b. Project B = 1.8 years (600+400) = 1000
c. Project C = 3 years (200+ 300 + 500) = 1000
3. To identify with is the better project to pursue is __________.
Because in business is time is money
This is where more sophisticated methods like Net Present Value or Internal Present
Value.
Alaskan Lumber is considering the purchase of a band saw that costs $50,000 and which
will generate $10,000 per year of net cash flow. The payback period for this capital
investment is 5.0 years. Alaskan is also considering the purchase of a conveyor system
for $36,000, which will reduce sawmill transport costs by $12,000 per year. The payback
period for this capital investment is 3.0 years. If Alaskan only has sufficient funds to
invest in one of these projects, and if it were only using the payback method as the basis
for its investment decision, it would buy the conveyor system, since it has a shorter
payback period.
ABC International has received a proposal from a manager, asking to spend $1,500,000
on equipment that will result in cash inflows in accordance with the following table:
The total cash flows over the five-year period are projected to be $2,000,000, which is
an average of $400,000 per year. When divided into the $1,500,000 original investment,
this results in a payback period of 3.75 years. However, the briefest perusal of the
projected cash flows reveals that the flows are heavily weighted toward the far end of
the time period, so the results of this calculation cannot be correct.
SUBJECT TEACHER: APPROVED FOR
IMPLEMENTATION:
Module 2ND
PRELIME MR. ALVIN JOHN M. PAZ
2 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
Unit STRATEGIC MANAGEMENT AND PROJECT SELECTION
Module STRATEGIC MANAGEMENT AND PROJECT SELECTION
PREC9-IPM PROJECT MANAGEMENT Units: 3.0 P a g e | 10
Instead, the company's financial analyst runs the calculation year by year, deducting the
cash flows in each successive year from the remaining investment. The results of this
calculation are:
The table indicates that the real payback period is located somewhere between Year 4
and Year 5. There is $400,000 of investment yet to be paid back at the end of Year 4,
and there is $900,000 of cash flow projected for Year 5. The analyst assumes the same
monthly amount of cash flow in Year 5, which means that he can estimate final payback
as being just short of 4.5 years.
The payback period is useful from a risk analysis perspective, since it gives a quick
picture of the amount of time that the initial investment will be at risk. If you were to
analyze a prospective investment using the payback method, you would tend to accept
those investments having rapid payback periods and reject those having longer ones. It
tends to be more useful in industries where investments become obsolete very quickly,
and where a full return of the initial investment is therefore a serious concern. Though
the payback method is widely used due to its simplicity, it suffers from the following
problems:
1. Asset life span. If an asset’s useful life expires immediately after it pays back the
initial investment, then there is no opportunity to generate additional cash flows.
The payback method does not incorporate any assumption regarding asset life
span.
2. Additional cash flows. The concept does not consider the presence of any
additional cash flows that may arise from an investment in the periods after full
payback has been achieved.
3. Cash flow complexity. The formula is too simplistic to account for the multitude
of cash flows that actually arise with a capital investment. For example, cash
investments may be required at several stages, such as cash outlays for periodic
upgrades. Also, cash outflows may change significantly over time, varying with
customer demand and the amount of competition.
4. Profitability. The payback method focuses solely upon the time required to pay
back the initial investment; it does not track the ultimate profitability of a project
at all. Thus, the method may indicate that a project having a short payback but
with no overall profitability is a better investment than a project requiring a long-
term payback but having substantial long-term profitability.
5. Time value of money. The method does not take into account the time value of
money, where cash generated in later periods is worth less than cash earned in
the current period. A variation on the payback period formula, known as the
discounted payback formula, eliminates this concern by incorporating the time
SUBJECT TEACHER: APPROVED FOR
IMPLEMENTATION:
Module 2ND
PRELIME MR. ALVIN JOHN M. PAZ
2 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
Unit STRATEGIC MANAGEMENT AND PROJECT SELECTION
Module STRATEGIC MANAGEMENT AND PROJECT SELECTION
PREC9-IPM PROJECT MANAGEMENT Units: 3.0 P a g e | 12
value of money into the calculation. Other capital budgeting analysis methods
that include the time value of money are the net present value method and the
internal rate of return.
6. Individual asset orientation. Many fixed asset purchases are designed to improve
the efficiency of a single operation, which is completely useless if there is a
process bottleneck located downstream from that operation that restricts the
ability of the business to generate more output. The payback period formula
does not account for the output of the entire system, only a specific operation.
Thus, its use is more at the tactical level than at the strategic level.
SELF-CHECK PN-2.1.1
Chapter Review:
Alaskan Lumber is considering the purchase of a band saw that costs $50,000 and which
will generate $10,000 per year of net cash flow. The payback period for this capital
investment is 5.0 years. Alaskan is also considering the purchase of a conveyor system
for $36,000, which will reduce sawmill transport costs by $12,000 per year. The payback
period for this capital investment is 3.0 years. If Alaskan only has sufficient funds to
invest in one of these projects, and if it were only using the payback method as the basis
for its investment decision. Solve the following to help ALASKAN to choose whether to
buy the conveyor system or band saw, since the rule of payback method shorter
payback period is more important because time is money.
Sales: $75,000
Cost of ingredients: $45,000
Salaries expenses: $13,500
Maintenance expenses: $1,500
Non-cash expenses:
Depreciation expense: $5,000
Required: Should Rani Beverage Company purchase the new equipment? Use payback
method for your answer. And Explain your answer.
PRECAUTIONS:
None
ASSESSMENT METHOD: WRITTEN WORK CRITERIA CHECKLIST
CRITERIA SCORING
Did I . . . 1 2 3 4 5
1. Get an early start. It's much easier to come up with and
organize your ideas when you're not pressed for time and
are able to conduct proper research.
2. Choose a topic. Your instructor will likely give you a handful
of topics to choose from or a general topic area.
3. Use various sources of information. With the vast amount
of information available today, you're far from limited when
it comes to choosing your sources. Use books, websites,
journal articles, research studies, interviews—the world is
your oyster!
4. Just remember to keep track of your sources so that you can
cite them properly and add them to your bibliography.
5. Also check what kinds of sources your professor wants:
primary, secondary, or both?
6. Brainstorm (original) ideas. Brainstorm ideas, and use mind
mapping to come up with an original thesis statement. Mind
maps are diagrams that help you organize your thoughts and
visually understand how they are connected. Your goal
should be to develop a thesis statement that embodies the
focus and direction of your essay—it's what your essay is all
about.
7. Do not plagiarize. Cite your work and give credit where it's
due. Do not take credit for others' thoughts or ideas, and
make yourself aware of the basic rules for
avoiding plagiarism.
8. Provide evidence. Use evidence from your research to
support your ideas. Each body paragraph will contain an
original idea, but you will need to back it up with evidence to
make it credible.
9. Create an outline. Make a rough outline of the sections and
points of your essay. Writing your ideas down will help you
SUBJECT TEACHER: APPROVED FOR
IMPLEMENTATION:
Module 2ND
PRELIME MR. ALVIN JOHN M. PAZ
2 Meeting
Subject Teacher MR. WILBERT A. MAÑUSCA
School Director
Unit STRATEGIC MANAGEMENT AND PROJECT SELECTION
Module STRATEGIC MANAGEMENT AND PROJECT SELECTION
PREC9-IPM PROJECT MANAGEMENT Units: 3.0 P a g e | 17
5 - Excellently Performed
4 - Very Satisfactorily Performed
3 - Satisfactorily Performed
2 - Fairly Performed
1 - Poorly Performed
_______________________________
TEACHER
Date: ______________________