1. Presentation on Project Selection

2. 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 of 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
Models do not give any decision
Partially represent the reality

5. Project Evaluation Factors
Production Factors
Marketing
Financial
Personnel
Administrative

7. Project Selection Models: Non Numeric
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

8. Project Selection 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

9. Unweighted 0-1 Factor Model
A set of relevant factors is selected by management and then
usually listed in a preprinted form.
One or more raters score the project on each factor, depending
whether or not it qualifies for an individual criterion.
The criteria for choices are:
A clear understanding of organizational goals
A good knowledge of the firm’s potential project portfolio
Advantage of this model is that it uses several criteria.
Disadvantages are that it assumes all criteria are of equal
importance and it allows for no gradation of the degree to which
a specific project meets the various criteria.

10. Competitive Advantage
Project Criteria
Qualifies
Not Qualifies
A Payoff Potential x
Lack of Risk
Safety
Competitive Advantage
Total Score 3 1

11. Unweighted Factor Scoring Model
This model is used by constructing a simple linear measure of
the degree to which the project being evaluated meets each of the criteria.
Often a five-point scale is used to evaluate the project.
A variant of this selection process might choose the highest scoring
project.
The criteria are all assumed to be of equal importance.

12. Competitive Advantage
Project Criteria
Project A
Project B
Project C
Project D
A Payoff Potential
High
Low
Medium
Lack of Risk
Safety
Competitive Advantage
High = 3
Medium = 2
Low = 1

13. Competitive Advantage
Project Criteria
Project A
Project B
Project C
Project D
A Payoff Potential 3 1 2
Lack of Risk
Safety
Competitive Advantage
Total 9 7 6 10

14. Weighted Factor Scoring Model
A weighted factor scoring model is when each of the relevant
factors selected by management is given numeric weights to reflect
the importance of each of them in the project.
The weights may be generated by any technique that is acceptable
to the organization’s policy makers.
Each project receives a score that is the weighted sum of its grade
on a list of criteria. Scoring models require:
agreement on criteria
agreement on weights for criteria
a score assigned for each criteria

15. Assessment Criteria Importance Weights 1. Payoff potential 4
2. Lack of risk 3
3. Safety 1
4. Competitive advantage 3

16. Competitive Advantage
Project Criteria
Project A
Project B
Project C
Project D
A Payoff Potential 12 4 8
Lack of Risk 3 6 9
Safety 2 1
Competitive Advantage
Total 24 18 29

17. Project Selection Models: Profit/Profitability
Payback Period
Average Rate of Return
Discounted Cash Flow
Internal Rate of Return
Profitability Index

18. Financial Appraisal of Project
Basic questions
Is the project worthwhile financially (that is whether it will
generate sufficient cash flows to repay debt and produce a
satisfactory rate of return on investment)?
How to select the "best" project from a list of projects?
Most common measures
Net Present Value (NPV), Internal Rate of Return (IRR), Payback
Period, Return on Investment (ROI), Discounted Cash Flow.
project management

19. NPV = Net Present Value (NPV)
Calculate the present value of all future cash flows with the
discounting factor (MARR)
Add all the present values of cash in-flows (cash revenues) and
subtract all the present values of cash out-flows (cash expenses)
What we obtain is the Net Present Value or NPV
Positive NPV means attractive financial return, and larger NPV
means more attractive project alternative.
NPV =
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20. NPV(IRR) = 0 = Internal Rate of Return (IRR)
IRR is defined as the value of discount rate for which NPV
is exactly zero.The calculation should be carried out using
financial calculators or computer software (like Excel)
Larger IRR indicates that the project is more attractive financially.
NPV(IRR) = 0 =
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21. Payback Period
The amount of time required to recover the initial investment that the sponsors inject in the project.
Unrecovered cost at start of year
Payback = Year before full recovery +
Cash flow during year
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22. Problem#1
Compare following projects Based on NPV, IRR, and Payback Period
At 10% WACC
Net Cash Flow($)
Year
Project S
Project L
-1000 1
500
100 2
400
300 3 4
600
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23. Comparing Projects With Unequal Lives
Two projects with unequal lives are compared by replacement
chain approach or through Uniform Annual Equivalent method
Net Cash Flow($)
Year
Project C
Project F
-40000
-20000 1
8000
7000 2
14000
13000 3
12000 4 5
11000 6
Project has 11.5% WACC
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24. Assessment of Profitability Models
NPV
B/c
IRR PP
ARR
Theoretical Consideration
1.Does the method consider all the cash flows? Y N ?
2.Does the method discount cash flows at the opportunity cost of funds?
3.Does the method satisfy the principle of value additivity?
4.Does the method maximizes shareholders’ wealth?
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25. NPV B/c IRR PP ARR Y N Perhaps
Practical Consideration
1.Is the method simple? Y
2.Can the method be used with limited information? N
Perhaps
3.Does the method give a relative measure?
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26. Pros and Cons of Profitability Models
Advantages
Simple to use and understand
Use readily available data
Model output is familiar to decision makers
Allows taking absolute decisions
Some models account for project risk
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27. Ignore all momentary factors except risk
Disadvantages
Ignore all momentary factors except risk
Some models Ignore the timing of the cash flows and time value of
money
Some models strongly biased toward short run
Pay back type models ignore cash flows beyond the payback period
The IRR model can result in multiple result
All are sensitive to errors in input data for the early years of project
All discounting models are non-linear, and the effects of changes in
the variables are generally not obvious to decision makers
All these models depend for input on a determination of cash flows
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28. PVIF (k, n) Table
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29. PVIFA (k, n) Table
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30. FVIF (k, n) Table
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31. FVIFA (k, n) Table
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