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Session-3-Unit-1 Introduction To Project Management

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78 views7 pages

Session-3-Unit-1 Introduction To Project Management

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Aathirithika
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PROJECT SELECTION METHODS

Project selection in project management refers to the process of choosing the next possible plan of
action for your team. It is one of the crucial stages for an enterprise.
There are two categories of project selection methods:
 Benefit Measurement Methods
 Constrained Optimization Methods

1. Benefit Measurement Methods


 Benefit Measurement is a project selection technique based on the present value of estimated cash
outflow and inflow. Cost benefits are calculated and then compared to other projects to make a
decision. The techniques that are used in Benefit Measurement are as follows: 16

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PROJECT SELECTION METHODS

2. Benefit/Cost Ratio:
 Cost/Benefit Ratio, as the name suggests, is the ratio between the Present Value of Inflow or the
cost invested in a project to the Present Value of Outflow, which is the value of return from the
project.
 Projects that have a higher Benefit-Cost Ratio or lower Cost-Benefit Ratio are generally chosen
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over others.
CW3007/IT PROJECT MANAGEMENT/III CSBS/V-SEM/KG-KITE
PROJECT SELECTION METHODS
3. Economic Model
 EVA, or Economic Value Added, is the performance metric that calculates the worth-creation of
the organization while defining the return on capital.
 It is also defined as the net profit after the deduction of taxes and capital expenditure.
 If there are several projects assigned to a project manager, the project that has the highest
Economic Value Added is picked. The EVA is always expressed in numerical terms and not as a
percentage.
4. Scoring Model in Project Management
 The scoring model in project management is an objective technique: the project selection
committee lists relevant criteria, weighs them according to their importance and their priorities,
then adds the weighted values.
 Once the scoring of these projects is completed, the project with the highest score is chosen.
5. Payback Period
 Payback Period is the ratio of the total cash to the average per period cash. It is the time necessary
to recover the cost invested in the project.
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PROJECT SELECTION METHODS
 The Payback Period is a basic project selection method. As the name suggests, the payback period
takes into consideration the payback period of an investment.
 It is the time frame that is required for the return on an investment to repay the original cost that
was invested.
6. Net Present Value
 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.
7. Discounted Cash Flow
 It’s well-known that the future value of money will not be the same as it is today. For example,
$20,000 won’t have the same worth ten years from now.
 Therefore, during calculations of cost investment and ROI, be sure to consider the concept of
discounted cash flow.
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PROJECT SELECTION METHODS
8. Internal rate of return
 Lumen Learning defines the internal rate of return as the ―rate of return that makes the net present
value of all cash flows (both positive and negative) from a particular investment equal to zero.‖
 In our example, suppose that we need a new set of couches for the restaurant.
 The cost of the couches is $500 and our annual savings are $150. Now, dividing the initial cost by
the annual saving per year, the IRR you get is 3.33 percent.
9. Opportunity Cost
 Opportunity Cost is the cost that is given up when selecting another project. During project
selection, the project that has the lower opportunity cost is chosen.
10. Constrained Optimization Methods
Constrained Optimization Methods, also known as the Mathematical Model of Project Selection, are
used for larger projects that require complex and comprehensive mathematical calculations.

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PROJECT SELECTION METHODS

1. Integer Programming:
In this method, the integer value of the product is given preference over the fractional value. For example,
producing a certain product like computers can never be fractional.
2. Linear Programming:
It is a method where the overall cost of the project is reduced by reducing the time spent on each activity.
The project is either run at the normal time or crash time. For example, you can sell more products if you
make them faster within the same period.
3. Dynamic Programming:
In this method, the complex project is broken down into simpler problems. Various techniques are used to
solve a problem in this method. Thus, instead of building a computer, the company will break it down to
build several parts that would add up to the development of the whole computer. 21

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PROJECT SELECTION METHODS
4. Nonlinear Programming:
 It involves maximizing a given variable in a situation when other variables aren’t linearly tied to
it.
 Thus, for example, if you’re increasing the number of computers produced as mentioned in the
above example then you should also take into consideration the tariffs and costs of expired bulk
shipping.
5. Multiple Objective Programming :
 This method is a combination of all of the above. Mathematical calculations help you optimize
your decisions.
 For example, you create equations that define the time and cost of the products in making each
computer and make appropriate adjustments accordingly.

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