Presentation on theme: "Project Management A Managerial Approach"— Presentation transcript:
1Project Management A Managerial Approach Chapter 2Project Selection
2Project SelectionProject 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 achievedManagers often use decision-aiding models to extract the relevant issues of a problem from the details in which the problem is embeddedModels represent the problem’s structure and can be useful in selecting and evaluating projects
3Criteria for Project Selection Models Realism - reality of manager’s decisionCapability- able to simulate different scenarios and optimize the decisionFlexibility - provide valid results within the range of conditionsEase of Use - reasonably convenient, easy execution, and easily understoodCost - Data gathering and modeling costs should be low relative to the cost of the projectEasy Computerization - must be easy and convenient to gather, store and manipulate data in the model
4Nature of Project Selection Models 2 Basic Types of ModelsNumericNonnumericTwo 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
5Nonnumeric ModelsSacred Cow - project is suggested by a senior and powerful official in the organizationOperating Necessity - the project is required to keep the system runningCompetitive Necessity - project is necessary to sustain a competitive positionProduct 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
6Numeric Models: Profit/Profitability Payback period - initial fixed investment/estimated annual cash inflows from the projectAverage Rate of Return - average annual profit/average investmentDiscounted Cash Flow - Present Value MethodInternal Rate of Return - Finds rate of return that equates present value of inflows and outflowsProfitability Index - NPV of all future expected cash flows/initial cash investment
8Risk Versus Uncertainty Analysis Under Uncertainty - The Management of RiskThe difference between risk and uncertaintyRisk - 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 determinedUncertainty - when a decision maker has information that is not complete and therefore cannot determine the expected value of each alternative
9Risk AnalysisPrincipal 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 processUsually understood to use financial measures in determining the desirability of an investment project
10Risk AnalysisProbability distributions are determined or subjectively estimated for each of the “uncertain” variablesThe probability distribution for the rate of return (or net present value) is then found by simulationBoth the expectation and its variability are important criteria in the evaluation of a project
12Information Base for Selections Accounting DataMeasurementsSubjective vs. ObjectiveQuantitative vs. QualitativeReliable vs. UnreliableValid vs. InvalidTechnological Shock
13Project 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?
14Project Proposal Contents Executive SummaryCover LetterNature of the technical problemPlan for Implementation of ProjectPlan for Logistic Support & Administration of the projectDescription of group proposing to do the workAny relevant past experience that can be applied
15SummaryPrimary selection criteria are realism, capability,flexibility, ease of use, and costIn 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
16SummaryNumeric Models can be subdivided into profitability and scoring modelsTo handle uncertainty, pro forma documents, risk analysis, and simulation with sensitivity analysis are helpfulSpecial 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
17SummaryProject 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.