1. Project Management A Managerial Approach
Chapter 2
Project Selection

2. Project Selection
Project 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
Managers often use decision-aiding models to extract the relevant issues of a problem from the details in which the problem is embedded
Models represent the problem’s structure and can be useful in selecting and evaluating projects

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

4. Nature of Project Selection Models
2 Basic Types of Models
Numeric
Nonnumeric
Two Critical Facts:
Models do not make decisions - People do!
All models, however sophisticated, are only partial representations of the reality the are meant to reflect

5. Nonnumeric Models
Sacred Cow - project is suggested by a senior and powerful official in the organization
Operating Necessity - the project is required to keep the system running
Competitive Necessity - project is necessary to sustain a competitive position
Product 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.
Comparative Benefit Model - several projects are considered and the one with the most benefit to the firm is selected

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

7. Numeric Models: Scoring
Unweighted 0-1 Factor Model
Unweighted Factor Scoring Model
Weighted Factor Scoring Model
Constrained Weighted Factor Scoring Model
Goal Programming with Multiple Objectives

8. Risk Versus Uncertainty
Analysis Under Uncertainty - The Management of Risk
The difference between risk and uncertainty
Risk - 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
Uncertainty - when a decision maker has information that is not complete and therefore cannot determine the expected value of each alternative

9. Risk Analysis
Principal 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
Usually understood to use financial measures in determining the desirability of an investment project

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

11. Risk Analysis

12. Information Base for Selections
Accounting Data
Measurements
Subjective vs. Objective
Quantitative vs. Qualitative
Reliable vs. Unreliable
Valid vs. Invalid
Technological Shock

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

14. Project Proposal Contents
Executive Summary
Cover Letter
Nature of the technical problem
Plan for Implementation of Project
Plan for Logistic Support & Administration of the project
Description of group proposing to do the work
Any relevant past experience that can be applied

15. Summary
Primary selection criteria are realism, capability,flexibility, ease of use, and cost
In 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.
Models can be numeric or nonnumeric

16. Summary
Numeric Models can be subdivided into profitability and scoring models
To handle uncertainty, pro forma documents, risk analysis, and simulation with sensitivity analysis are helpful
Special 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
Project proposals generally consist of several sections: the technical approach, the implementation plan, the plan for logistics support and administration, and past experience.
The 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

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Figure 2-2

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Table Files

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