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https://pmstudycircle.

com/2014/03/projectselectionmethods/

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.

Hereiswherethisblogpostfinishes.Ifyouhavesomethingonyourmind,shareitthroughthe
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