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
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
|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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