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

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