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Project Management A Managerial Approach Chapter 2 Project Selection.

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Presentation on theme: "Project Management A Managerial Approach Chapter 2 Project Selection."— Presentation transcript:

1 Project Management A Managerial Approach Chapter 2 Project Selection

2 zProject selection is the process of evaluating individual projects or groups of projects, and then choosing to implement some set of them so that the objectives of the parent organization will be achieved zManagers often use decision-aiding models to extract the relevant issues of a problem from the details in which the problem is embedded zModels represent the problem’s structure and can be useful in selecting and evaluating projects

3 Criteria for Project Selection Models zRealism - reality of manager’s decision zCapability- able to simulate different scenarios and optimize the decision zFlexibility - provide valid results within the range of conditions zEase of Use - reasonably convenient, easy execution, and easily understood zCost - Data gathering and modeling costs should be low relative to the cost of the project zEasy Computerization - must be easy and convenient to gather, store and manipulate data in the model

4 Nature of Project Selection Models y2 Basic Types of Models xNumeric xNonnumeric yTwo Critical Facts: xModels do not make decisions - People do! xAll models, however sophisticated, are only partial representations of the reality the are meant to reflect

5 Nonnumeric Models zSacred Cow - project is suggested by a senior and powerful official in the organization zOperating Necessity - the project is required to keep the system running zCompetitive Necessity - project is necessary to sustain a competitive position zProduct Line Extension - projects are judged on how they fit with current product line, fill a gap, strengthen a weak link, or extend the line in a new desirable way. zComparative Benefit Model - several projects are considered and the one with the most benefit to the firm is selected

6 Numeric Models: Profit/Profitability yPayback period - initial fixed investment/estimated annual cash inflows from the project yAverage Rate of Return - average annual profit/average investment yDiscounted Cash Flow - Present Value Method yInternal Rate of Return - Finds rate of return that equates present value of inflows and outflows yProfitability Index - NPV of all future expected cash flows/initial cash investment

7 Numeric Models: Scoring zUnweighted 0-1 Factor Model zUnweighted Factor Scoring Model zWeighted Factor Scoring Model zConstrained Weighted Factor Scoring Model zGoal Programming with Multiple Objectives

8 Risk Versus Uncertainty zAnalysis Under Uncertainty - The Management of Risk yThe difference between risk and uncertainty xRisk - when the decision maker knows the probability of each and every state of nature and thus each and every outcome. An expected value of each alternative action can be determined xUncertainty - when a decision maker has information that is not complete and therefore cannot determine the expected value of each alternative

9 Risk Analysis zPrincipal contribution of risk analysis is to focus the attention on understanding the nature and extent of the uncertainty associated with some variables used in a decision making process zUsually understood to use financial measures in determining the desirability of an investment project

10 Risk Analysis zProbability distributions are determined or subjectively estimated for each of the “uncertain” variables zThe probability distribution for the rate of return (or net present value) is then found by simulation zBoth the expectation and its variability are important criteria in the evaluation of a project

11 Risk Analysis

12 Information Base for Selections zAccounting Data zMeasurements ySubjective vs. Objective yQuantitative vs. Qualitative yReliable vs. Unreliable yValid vs. Invalid zTechnological Shock

13 Project Proposals zWhich projects should be bid on? zHow should the proposal-preparation process be organized and staffed? zHow much should be spent on preparing proposals for bids? zHow should the bid prices be set? zWhat is the bidding strategy? Is it ethical?

14 Project Proposal Contents zExecutive Summary zCover Letter zNature of the technical problem zPlan for Implementation of Project zPlan for Logistic Support & Administration of the project zDescription of group proposing to do the work zAny relevant past experience that can be applied

15 Summary zPrimary selection criteria are realism, capability,flexibility, ease of use, and cost zIn preparing to use a model, a firm must identify its objectives, weighting them relative to each other, and determining the probable impacts of the project on the firm’s competitive abilities. zModels can be numeric or nonnumeric

16 Summary zNumeric Models can be subdivided into profitability and scoring models zTo handle uncertainty, pro forma documents, risk analysis, and simulation with sensitivity analysis are helpful zSpecial care should be given to data in project selection models. Of concern are data taken from accounting data base and the effect of technological shock

17 Summary zProject proposals generally consist of several sections: the technical approach, the implementation plan, the plan for logistics support and administration, and past experience. zThe history of project selection models has shown an increase in the use of formal models, particularly profitability models.

18 Project Selection Questions?

19 Project Selection Picture Files

20 Project Selection Figure 2-1

21 Project Selection Figure 2-2

22 Project Selection Table Files

23 Project Selection

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