IS318LN03

The Papua New Guinea University of Technology|
Department of Business Studies|

IT-Section-318-ICT Project Management|
Subject Coordinator-Rodney Naro-DBS-IT-Section|
[email protected]|
Lecture-3
❑Project
Selection and Portfolio
Management
Rodney Naro-DBS-IT Section 1

3/18/2024
Learning Objectives
3.1 Explain six criteria for a useful project
selection/screening model.
3.2 Understand how to employ a variety of screening and
selection models to select projects.
3.3 Learn how to use financial concepts, such as the
efficient frontier and risk/return models.
3.4 Identify the elements in the project portfolio selection
process and discuss how they work in a logical sequence
to maximize a portfolio.
PMBOK Core Concepts
Project Management Body of Knowledge (PMBoK)
covered in this chapter includes:
❑ Portfolio Management (PMBoK 1.4.2)
Project Selection
Screening models help managers pick winners from a pool of
projects. Screening models are numeric or nonnumeric and
should have:
❑ Realism
❑ Capability
❑ Flexibility
❑ Ease of use
❑ Cost effectiveness
❑ Comparability
Screening and Selection Issues (1 of
2)
1. Risk—unpredictability to the firm

a.Technical
b. Financial
c. Safety
d. Quality
e. Legal exposure
2. Commercial—market potential
a. Expected return on investment
b. Payback period
c. Potential market share
d. Long-term market dominance
e. Initial cash outlay
f.Ability to generate future business/new markets
Screening and Selection Issues (2 of
2)
3. Internal operating—changes in firm operations

a. Need to develop/train employees
b. Change in workforce size or composition
c. Change in physical environment
d. Change in manufacturing or service operations
4. Additional
a. Patent protection
b. Impact on company’s image
c. Strategic fit
All models only partially reflect reality and have both objective and subjective
factors imbedded.
Approaches to Project Screening
❑ Checklist model
❑ Simplified scoring models
❑ Analytic hierarchy process
❑ Profile models
Checklist Model
A checklist is a list of criteria applied to possible projects.

• Requires agreement on criteria
• Assumes all criteria are equally important
Checklists are valuable for recording opinions and

stimulating discussion.
Simplified Scoring Models
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
Score =  (Weight  Score)
Relative scores can be misleading!

Analytic Hierarchy Process
The AHP is a four step process:
1. Construct a hierarchy of criteria and subcriteria.
2. Allocate weights to criteria.
3. Assign numerical values to evaluation dimensions.
4. Determine scores by summing the products of numeric
evaluations and weights.
Unlike the simple scoring model, these scores can be

compared!
Figure 3.1 Sample AHP with Rankings for
Salient Selection Criteria
Figure 3.4 Profile Model
Financial Models
❑ Payback period
❑ Net present value
❑ Discounted payback period
❑ Internal rate of return
Payback Period
Determines how long it takes for a project to reach a

breakeven point.
Investment
Payback Period =
Annual Cash Savings
Cash flows should be discounted.

Lower numbers are better (faster payback).
Payback Period Example (1 of 3)
Table 3.5 Initial Outlay and Projected Revenues for Two Project
Options
Project A Project A Project B Project B

Blank Revenues Outlays Revenues Outlays
Year 0 Blank $500,000 Blank $500,000
Year 1 $50,000 Blank $75,000 Blank
Year 2 150,000 Blank 100,000 Blank
Table 3.6 Comparison of Payback for Projects A and B
Table 3.6 [continued]
Net Present Value
Projects the change in the firm’s value if a project is undertaken.
Ft
NPV = Io + 
(1+ r + pt )t
Where
Ft = net cash flow for period t Higher NPV values
r = required rate of return are better!
I = initial cash investment
pt = inflation rate during period t
Net Present Value Example
Table 3.8 Discounted Cash Flows and NPV (I)
Table 3.9 Discounted Payback
Method
Project Cash Flow*
Year Discounted Undiscounted
1 $8,900 $10,000
2 7,900 10,000
3 7,000 10,000
4 6,200 10,000
5 5,500 10,000
Payback Period 4 Years 3 Years
*Cash flows rounded to the nearest $100.

Discount sum of cash flows by the company’s required rate of return
to get a more accurate payback period.
Internal Rate of Return
A project must meet a minimum rate of return before it is
worthy of consideration.
t
ACFt Higher IRR
IO =  values are
n =1 (1 + IRR )t
better!
where
ACFt = annual after tax cash flow for time period t
IO = initial cash outlay
n = project’s expected life
IRR = the project’s internal rate of return
Internal Rate of Return Example
This table has been calculated using a discount rate of 15%.
Discount Factor Discount Factor at Discount Factor NP

Year Inflows 15% V
1 $2,500 .870 $2,175
2 2,000 .756 1,512
3 2,000 .658 1,316
Present value of inflows Blank Blank 5,003
Cash investment Blank Blank 5,000
Difference Blank Blank $3
The project does meet our 15% requirement and should be considered
further.
Project Portfolio Management
The systematic process of selecting, supporting,
and managing the firm’s collection of projects.
Portfolio management objectives and initiatives require:
• decision making
• prioritization
• review
• realignment
• reprioritization of a firm’s projects
The Portfolio Selection Process
The portfolio selection process is an integrated framework of
interrelated steps and activities.
• Preprocess Phase
– Methodology of selection and strategy
• Process Phase
– Prescreening, individual project analysis, screening, portfolio
selection, and portfolio adjustment
• Postprocess Phase
– Project development, project evaluation, and portfolio
completion
Figure 3.8 Project Portfolio Selection Process
Developing a Proactive Portfolio
The project portfolio matrix classifies projects into four
types according to commercial potential and technical
feasibility:
• Bread and butter
• Pearls
• Oysters
• White elephant
Figure 3.9 Project Portfolio Matrix
Keys to Successful Project Portfolio
Management
❑ Flexible
structure and freedom of communication
❑ Low-cost environmental scanning
❑ Time-paced transition
Problems in Implementing Portfolio
Management
❑ Conservative technical communities
❑ Out-of-sync projects and portfolios
❑ Unpromising projects
❑ Scarce resources
Summary
1. Explain six criteria for a useful project
selection/screening model.
2. Understand how to employ a variety of screening and
selection models to select projects.
3. Learn how to use financial concepts, such as the
efficient frontier and risk/return models.
4. Identify the elements in the project portfolio selection
process and discuss how they work in a logical
sequence to maximize a portfolio.

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The Papua New Guinea University of Technology|

Department of Business Studies|

Rodney Naro-DBS-IT Section 1

1. Risk—unpredictability to the firm

3. Internal operating—changes in firm operations

A checklist is a list of criteria applied to possible projects.

Checklists are valuable for recording opinions and

Each project receives a score that is the weighted sum of its

Score =  (Weight  Score)

Relative scores can be misleading!

Unlike the simple scoring model, these scores can be

Determines how long it takes for a project to reach a

Cash flows should be discounted.

Project A Project A Project B Project B

*Cash flows rounded to the nearest $100.

Discount Factor Discount Factor at Discount Factor NP

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