Project Initiation Activities
Project Selection Models
Most organizations have an established selection criteria which ranges from an educated guess to a quantitative study. Whatever method is used, there needs to be a valid reason for selecting the project.
Before using any model, corporate strategic goals and objectives must be established and a model selected that best meets these goals.
The most commonly used project selection method is the benefit measurement methods. There are two types of benefit measurement Project Selection Models: nonnumeric and numeric.
Examples of Non-numeric Models
Models |
Reasons for Project Selection |
Sacred Cow | Executive proposed project |
Operating Necessity | Project required for company success |
Competitive Necessity | Stay competitive |
Product Extension Line | Increases market share |
Comparative Benefit Model | List and rank benefits |
Examples of Numeric Models
Models |
Methods |
Payback Period | Initial fixed investment divided by estimated annual cash inflows from the project |
Average Rate of Return (ARR) | Ratio of average annual profit to initial or average investment in project |
Time value of money | A method to estimate what the value of current money will be in the future. |
Discounted cash flow – Net Present Value Method | A method to estimate the value of an investment. NPV of all cash flows discounted by hurdle rate |
Internal Rate of Return (IRR) | Discount rate that equates the 2 sets of flows: cash inflows and outflows |
Profitability Index (benefit-cost-ratio) | NPV of all future expected cash flows divided by initial cash investment. Project OK if ratio is > 1.0 |