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Ithappensmanytimesthatyougetmanychoiceswhenselectingthebestoption.Forexample,you
mayhavetheoptiontoselectwhichmovieyouwanttoseeorwhereyoushouldgoforyournext
vacation.
Inyourpersonallifeyoumaymakethedecisionjustrandomly,orbaseduponyourexperienceand/or
suggestionsfromyourfamilymembersorfriends.
However,inprofessionallifewhenyouhavebeengivenoptionstomakeaselection,yougobysome
rulesbecauseherethestakesarehighandyoucannotaffordtomakeawrongdecision.
Supposeyourorganizationhasgottenmanyprojects,butduetoresourceconstraints,yourorganization
cannotundertakeallprojectsatonce.Therefore,yourorganizationhastomakethedecisiontoselecta
projectwhichislessrisky,andcouldprovidethemwithmaximumprofitandrecognition.
Therearevariousmethodswhichhelpyouchooseyourprojectwisely.Thesemethodscanbedivided
intotwocategories:
1. BenefitMeasurementMethods,and
2. ConstrainedOptimizationMethod
Althoughthereisadifferenceamongmethodologiesusedineachtechnique,thebasicprincipleand
ultimategoalarethesame,whichistoprovideyourorganizationthemaximumprofitandrecognition.
Infact,everyorganizationhasadefinedprocessthathelpsthemchoosetherightprojectalignedwith
theirstrategicobjectives.
Generally,thisprocessisperformedbyuppermanagement;forexample,theSteeringCommittee,
ProjectManagementOffice(PMO),ProjectSelectionCommittee,etc.
Whileevaluatingtheprojecttheywillevaluatemanythings,suchas:
Whethertheyarecapableofdoingitornot
Iftheyhaveallresourcesrequiredtocompletetheproject
Ifitwillhelpthemachievetheirobjective(recognitionandmaximumprofit)
Okay,nowletsdiscusseachtypeofprojectselectionmethod.
BenefitMeasurementMethods
Thistechniqueiswidelyusedintheselectionofprojects,whichisbasedonthepresentvalueof
estimatedcashinflowandoutflow.Hereyoucalculatethecostandbenefits,andthencomparethem
withotherprojectstomakeadecision.
Beforewemovetobenefitmeasurementtechniques,wehavetounderstandoneimportantconcept:
DiscountedCashFlows.
DiscountedCashFlow
Weallknowthattheworthofmoneyreceivedtodayismorethanthemoneyreceivedinthefuture.For
example,thevalue$10,000USDafter10yearswillnotbesameastoday;itsworthwillbefarlower
thanthecurrentvalueof$10,000USD.
Thereforewhilecalculatingthecostinvestedandreturnoninvestment,wehavetoconsidertheconcept
ofdiscountedcashflow.
NowletsgetbacktoBenefitsMeasurementMethods.
ThefollowingisalistoftechniquesusedinBenefitMeasurementMethods:
Benefit/CostRatio
EconomicModel(EconomicValueAdded)
ScoringModel
PaybackPeriod
NetPresentValue
DiscountedCashFlow
InternalRateofReturn
OpportunityCost
Benefit/CostRatio
ThistechniqueisalsoknownasCost/BenefitRatio.
Asthenamesuggests,itistheratiobetweenthepresentvalueofinflow(costinvestedtotheproject)
andpresentvalueofoutflow(valueofreturnformtheproject).Ifthebudgetisnotaconstraint,the
projectwithhigherBenefitCostRatio(BCR)willbeselected.
EconomicValueAdded(EVA)
EconomicValueAdded(EVA)isaperformancemetricthatcalculatestheworthcreationforthe
organization,anddefinesthereturnoncapital(ROC).Itisthenetprofitafterdeductingalltaxesand
capitalexpenditure.
Ifyouhavemanyprojects,theprojectwiththehigherEconomicValueAdded(EVA)willbeselected.
KeepinmindthatEVAisexpressedindollarvalue,notinapercentage.
ScoringModel
Thisismorelikeanobjectivetechnique.Here,theprojectselectioncommitteewilllistafewrelevant
criteria,weighthemaccordingtotheirprioritiesandimportance,andthenwilladdalltheseweighted
values.
Onceyoucompletescoringtheprojects,theprojectwithhighestscorewillbeselected.
PaybackPeriod
Thisistheratiooftotalcashoutwithaverageperperiodcashin.Oryoucansaythatitisthetime
requiredtorecoverthecostinvestedintheproject.
Ifotherparametersarethesame,theprojectwiththeminimumpaybackperiodwillbeselected.
NetPresentValue(NPV)
Thisisthedifferencebetweenthecurrentvalueofcashinflowandthecurrentvalueofcashoutflowof
theproject.NetPresentValue(NPV)shouldalwaysbepositive,andtheprojectwiththehigherNPV
willbeabetteroption.
InternalRateofReturn(IRR)
ThisistheinterestrateatwhichtheNetPresentValuebecomeszero.Inotherwordsyoucansaythatit
istherateatwhichthepresentvalueoftheoutflowisequaltothepresentvalueofinflows.
Ifyouhavemanyprojectstochoosefrom,youwillselecttheprojectwiththehigherIRR.
OpportunityCost
Thisisthecostthatwearegivingupbychoosingsomeotherproject.Ifyouhavemanyprojects,you
willchosetheprojectwiththelesseropportunitycost.
ThesearethefewBenefitsMeasurementTechniquesusedintheselectionofprojects.Ingeneral,for
mostorganizationsbenefitsmeasurementmethodsareenoughtoleadthemtoadecision.
ConstrainedOptimizationMethods
ThismodelisalsoknownastheMathematicalModelofprojectselection,whichisusedforlarge
projectsrequiringcomplexmathematicalcalculations.
ThefollowingisthelistoftechniquesusedintheMathematicalModelofprojectselection:
LinearProgramming
NonlinearProgramming
IntegerProgramming
DynamicProgramming
AdetaileddiscussionofthesetopicsisoutofthescopeofthePMPCertificationexam.Fortheexam,
allyouneedtoknowisthatthesearetheMathematicalModeltechniquesandareusedinproject
selection.
Summary
Projectselectiontechniqueshelpyouselectaprojectwhichcouldprovideyouwithabetterreturnon
investmentandrecognition.Therearevariousmethodstoselectaproject,howeveriftheprojectis
smallandnotverycomplex,youwillgoforthebenefitsmeasurementmodel.Ifitisalargeand
complexproject,youwillgofortheconstrainedoptimizationmethod.
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