1. Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall o P.I.I.M.T o American University of Leadership Ahmed Hanane, MBA, Eng, CMA, Partner email: ahanane360@gmail.com

2. o Strategy? o Vision et mission statements? o Stakeholder analysis? o Types of organizational structures? o Corporate culture?

3. Project Selection and Portfolio Management 03-03

4. After completing this chapter, students will be able to: Explain six criteria for a useful project- selection/screening model. Understand how to employ checklists and simple scoring models to select projects. Use more sophisticated scoring models, such as the Analytical Hierarchy Process. Learn how to use financial concepts, such as the efficient frontier and risk/return models. 03-04

5. After completing this chapter, students will be able to: Employ financial analyses and options analysis to evaluate the potential for new project investments. Recognize the challenges that arise in maintaining an optimal project portfolio for an organization. Understand the three keys to successful project portfolio management. 03-05

6. Screening models help managers pick winners from a pool of projects. Screening models are numeric or nonnumeric and should have: Realism Capability Flexibility Ease of use Cost effectiveness Comparability 03-04

7. o Risk – unpredictability to the firm o Commercial – market potential o Internal operating – changes in firm operations o Additional – image, patent, fit, etc. All models only partially reflect reality and have both objective and subjective factors imbedded 03-07

8. How do you select a projet among the above ?

9. o Checklist model o Simplified scoring models o Analytic hierarchy process o Profile models o Financial models 03-09

10. A checklist is a list of criteria applied to possible projects. Requires agreement on criteria Assumes all criteria are equally important Checklists are valuable for recording opinions and encouraging discussion 03-07

11. Critereac Return Skills Risk …

12. 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 Relative scores can be misleading! 03-012

13. CritereaWeightsScore Return40%5 Skills20%3 Risk20%5 … 3

14. The AHP is a four step process: 1. Construct a hierarchy of criteria and subcriteria 2. Allocate weights to criteria 3. Assign numerical values to evaluation dimensions 4. Scores determined by summing the products of numeric evaluations and weights Unlike the simple scoring model, these scores can be compared! 03-014

15. FIGURE 3.1 Sample AHP with Rankings for Salient Selection Criteria 03-15 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

16. Show risk/return options for projects. Criteria selection as axes Rating each project on criteria 03-16 Risk Return Maximum Desired Risk Minimum Desired Return X1X1 X4X4 X2X2 X3X3 X6X6 X5X5 Efficient Frontier X7X7 Figure 3.4

17. Figure 3.5 03-17 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

18. Based on the time value of money principal o Payback period o Net present value o Internal rate of return o Options models All of these models use discounted cash flows 03-18

19. Cash flows should be discounted Lower numbers are better (faster payback) Determines how long it takes for a project to reach a breakeven point 03-19

20. Payback Period Example A project requires an initial investment of $200,000 and will generate cash savings of $75,000 each year for the next five years. What is the payback period? YearCash FlowCumulative 0($200,000) 1$75,000($125,000) 2$75,000($50,000) 3$75,000$25,000 Divide the cumulative amount by the cash flow amount in the third year and subtract from 3 to find out the moment the project breaks even. 03-20 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

21. Projects the change in the firm’s stock value if a project is undertaken. Higher NPV values are better! 03-21

22. Net Present Value Example Should you invest $60,000 in a project that will return $15,000 per year for five years? You have a minimum return of 8% and expect inflation to hold steady at 3% over the next five years. YearNet flowDiscountNPV 0-$60,0001.0000-$60,000.00 1$15,0000.9009$13,513.51 2$15,0000.8116$12,174.34 3$15,0000.7312$10,967.87 4$15,0000.6587$9,880.96 5$15,0000.5935$8,901.77 -$4,561.54 The NPV column total is negative, so don’t invest! 03-22 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

23. A project must meet a minimum rate of return before it is worthy of consideration. Higher IRR values are better! 03-23

24. Internal Rate of Return Example A project that costs $40,000 will generate cash flows of $14,000 for the next four years. You have a rate of return requirement of 17%; does this project meet the threshold? YearNet flowDiscountNPV 0-$40,0001.0000-$40,000.00 1$14,0000.9009$12,173.91 2$14,0000.8116$10,586.01 3$14,0000.7312$9,205.23 4$14,0000.6587$8,004.55 -$30.30 This table has been calculated using a discount rate of 15% The project doesn’t meet our 17% requirement and should not be considered further. 03-24 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

25. NPV and IRR methods don’t account for failure to make a positive return on investment. Options models allow for this possibility. Options models address: 1. Can the project be postponed? 2. Will future information help decide? 03-25

26. o Team 1 o Team 2 o Team 3 o Team 4 Questions to be answered: o What’s your project o Criterea for selection o Team o Goals of the project

27. 03-27 FIGURE 3.6 GE’s Tollgate Process

28. The systematic process of selecting, supporting, and managing the firm’s collection of projects. Portfolio management requires: decision making, prioritization, review, realignment, and reprioritization of a firm’s projects. 03-28

29. 03-29 Figure 3.8 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

30.  Flexible structure and freedom of communication  Low-cost environmental scanning  Time-paced transition 03-30

31.  Conservative technical communities  Out of sync projects and portfolios  Unpromising projects  Scarce resources 03-31

32. 1. Explain six criteria for a useful project- selection screening model. 2. Understand how to employ checklists and simple scoring models to select projects, including the recognition of their strengths and weaknesses. 3. Use more sophisticated scoring models, such as the Analytical Hierarchy Process. 4. Learn how to use financial concepts, such as the efficient frontier and risk/return models. 03-32

33. 5. Employ financial analyses and options analysis to evaluate the potential for new project investments. 6. Recognize the challenges that arise in maintaining an optimal project portfolio for an organization. 7. Understand the three keys to successful project portfolio management. 03-33