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MGMT 483 – Week 2.  Focus on criteria and analytical tools for project selection  Project selection models and evaluation factors  Non-numeric models.

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Presentation on theme: "MGMT 483 – Week 2.  Focus on criteria and analytical tools for project selection  Project selection models and evaluation factors  Non-numeric models."— Presentation transcript:

1 MGMT 483 – Week 2

2  Focus on criteria and analytical tools for project selection  Project selection models and evaluation factors  Non-numeric models  Numeric models ▪ Profitability models ▪ Scoring models (using weightings)  Risk and uncertainty analysis  Project proposals – the procurement process Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

3  Companies considering projects fall into two broad categories: 1. Companies looking at projects to do for others (ie. for external clients) 2. Companies looking at projects to do for themselves (internal projects)  Both types of company must have some kind of criteria to help them decide where to focus their efforts Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

4  Must select which projects they will bid on  Generally based on…  Their own expertise and track record  Resources they have available  Their chance of winning the bid  Preparing a bid is expensive  They do not want to waste that effort on bids where they are unlikely to be successful Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

5  Must decide which potential projects they will pursue (sometimes among many competing projects)  Available capital is the major constraint  Profitability is often the major criteria  Must evaluate approaches when there is more than one project that can accomplish a particular business goal Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

6  Each project has different risks, benefits and costs – often much uncertainty  Companies need to be able to evaluate and select those projects that most closely fit the firm’s strategic objectives – always done in the context of competing for limited resources  Project selection models are used  Models abstract the relevant issues about a problem from the mass of detail in which the problem is embedded  Models help to make rational decisions Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

7  Numeric  Use financial metrics such as cash flow, profit etc  Non-numeric  Do not use numbers as inputs into the model, but other data or considerations  The tendency to rely solely on numeric profitability models can be a serious mistake  If the estimated level of goal achievement is sufficiently large, the project is selected Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

8  Table 2-1 on page 44  Production factors  Marketing factors  Financial factors  Personnel factors  Administrative and Miscellaneous factors Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

9  The Sacred Cow (the boss wants to do it)  The operating necessity (the basement is flooded)  The competitive necessity (we will lose sales if we don’t change)  The product line extension (will it fit?)  Comparative benefit model (how does it look in the context of other projects) Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

10  Models that return a numeric value for a project that can be easily compared with other projects  Two major categories of numeric models: 1. Profit/profitability 2. Scoring Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

11  Models that look at costs and revenues – there are several models, we will look at two in a bit more detail  Payback period (PB)  Discounted cash flow (NPV) Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

12 The lower the payback period the better – exposure / risk to the firm is minimized The Payback Period = the length of time until the original investment has been recouped by the project Problem 1, page 85

13 1. Does not consider time value of money 2. More difficult to use when cash flows change over time 3. Less meaningful over longer periods of time (due to time value of money) 4. It ignores any cash flows beyond the payback period  However, it is relatively simple to calculate and understand Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

14  The current worth of a stream of future cash inflows and outflows in today’s dollars, given a specified rate of return (the discount rate)  Widely used to evaluate projects  Includes the time value of money (the value of money figuring in a given amount of interest for a given period of time)  Includes all inflows and outflows, not just the ones through to the payback point Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

15  Requires a percentage to use to reduce future cash flows – the discount rate  The discount rate may also be know as a hurdle rate or cutoff rate  There will usually be one overall discount rate that is used as the standard for a company (set internally and used to evaluate all projects)  Cash flows are likely to vary over the life of a project Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

16 A 0 Initial cash investment F t The cash flow in time period t (negative for outflows) kThe discount rate tThe number of years of life  A higher NPV is better  The higher the discount rate, the lower the NPV

17  Initial investment of $100,000 with a net cash inflow of $25,000 per year for 8 years, a required rate of return of 15%, and an inflation rate of 3% per year, we have: Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley. The present value of the inflows is greater than the present value of the outflow – the NPV is positive. Therefore the project is acceptable.

18  Read through this and note the examples  Then do Problem 3 on page 85 Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

19  The undiscounted models (such as Paybabck Period) are easy to use and understand  Based on readily available accounting data and forecasts  Familiar and well understood by business decision makers  Can give a go/no-go indication, because they are based on “absolute” inputs  Some models can an be modified to include risk Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

20  They ignore non-monetary factors except risk  Some ignore time value of money  Discounting models are biased to the short-term because they reduce cash flows to present value  Payback models ignore cash flow after payback  They rely on accurate estimations of cash flow (which can be difficult)  They cannot deal with a lot of the complexity of the modern firm – reliance on financial data only Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

21  Scoring models attempt to overcome some of the disadvantages of probability models by incorporating additional decision criteria  Two broad categories of scoring models 1. Unweighted factor model 2. Weighted factor model Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

22  Uses a set of relevant factors as determined by management  Each factor is weighted the same  Less important factors are weighted the same as important ones  Easy to compute - just total or average the scores  The major disadvantage is that the model assumes that all factors are equally important Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

23 Figure 2-2 Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

24  When numeric weights reflecting the relative importance of each individual factor are added,we have a weighted factor scoring model  Weighting allows important factors to stand out  A good way to include non-numeric data in the analysis  Factors need to sum to one  All weights must be set up so higher values mean more desirable  Small differences in totals are not meaningful Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

25  Read through this and note the examples  Then do Problem 9 on page 85 Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

26 Figure B Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

27  They allow multiple criteria to be used for evaluation  Weighted models recognize that some criteria are more important than others  Structurally simple and relatively easy to understand  They are a direct reflection of management policy  Easily altered to accommodate change in management policy or priorities  They allow for sensitivity analysis, because trade-off between factors is easily observable Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

28  Ease of use can lead to the inclusion of too many criteria  The output of a scoring model is strictly a relative measure rather than an absolute go/no go indication  Unweighted scoring models assume all criteria are of equal importance – this is seldom the case Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

29  Everything to do with projects is risky  Some projects, like R&D, are more risky than others, like construction  Risks include…  The timing of the project and its associated cash flow  Risk regarding the outcome of the project  Risk about the side effects  Risk can be assessed by a number of methods, including simulation Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

30  Risk applies to events that have a known (or estimated) probability of occurrence.  Uncertainty applies to events where there is insufficient data to estimate the probability of occurrence.  For effective project management, decisions should be treated as risks rather than uncertainties. Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

31  The project proposal is the document that contains the information needed to evaluate and score a project proposal  From the point of view of the bidder preparing proposals is substantial work  Which proposals should we bid on?  What resources should be spent on writing the proposal?  What should be bid price be? What is the bid strategy? Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

32  Large organizations put out bids for projects  RFP (request for proposal)  RFI (request for information)  RFQ (request for quotation)  Electronic tendering / procurement  In Canada, public sector work is put out to bid via Merx and / or via online sites such as BC BidMerx BC Bid  Firms respond to the competitive process with project proposals Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

33 1. The technical approach A general description of the problem to be solved or the project to be undertaken  The general proposed approach / solution 2. The implementation plan  Estimates of the time required, materials and other resources to be used, aggregate costings  Gantt charts, network diagrams etc to show project timeline and milestones Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.

34 3. The plan for logistic support and administration  A description of the ability of the proposer to supply the routine facilities, equipment and skills needed  How subcontractors will be dealt with  Nature and timing of project reports and deliverables 4. Past experience of the proposer  A list of key project personnel and their experience and credentials (usually full CVs) Meredith & Mantel (2009) Project management: a managerial approach. 7th ed. Wiley.


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