1. Project Identification and Project Selection
Dr. Ziping Wang
PROJ 600

2. Agenda Project identification Project selection Project charter
Non-financial methods
Financial methods
Project charter
RFP (request for proposal)

3. Project Identification
Start of Initiating phase
Recognize need, problem, or opportunity
Various ways for identification
Organizations strategic planning
Response to unexpected events
Group organized to address a need
Important to clearly identify need to determine if worth pursuing
Use decision making process to prioritize and select project with greatest need

4. Project Selection Evaluate needs, costs, benefits Select project
Develop criteria
List assumptions
Gather data
Evaluate each opportunity
Combine “gut” feelings and quantitative information to make decision

5. A Set of Criteria in Project Selection
Develop a set of criteria against which the opportunity will be evaluated. For example:
Alignment with company goals
Anticipated sales volume
Increase in market share
Establishment of new markets
Anticipated retail price
Investment required
Estimated manufacturing cost per unit
Technology development required
Return on investment
Human resources impact
Public reaction
Competitors’ reaction
Expected time frame
Regulatory approval
Risks

6. Project Screening Models
Screening models help managers pick winners from a pool of projects. Screening models should have:
Realism: An effective model must reflect organizational objectives
Capability: A model should be flexible enough to respond to changes in the conditions under which projects are carried out.
Flexibility: The model should be easily modified if trial applications require changes.
Ease of use: A model must be simple enough to be used by people in all areas of the organization.
Cost effectiveness: The model must be cost effective.
Comparability: The model must be broad enough to be applied to multiple projects.

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

8. Approaches to Project Screening
Non-financial: projects of strategic importance to the firm.
Checklist model
Simplified scoring models
Analytic hierarchy process
profile models
Financial: payback, net present value (NPV), internal rate of return (IRR)

9. Checklist Model
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

10. Simplified Scoring Models
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!

11. Scoring Model 56
78.5 50
41.5
Project 1
Project 2
Project 3
Project 4

12. Analytic Hierarchy Process
The AHP is a four step process:
Construct a hierarchy of criteria and subcriteria
Allocate weights to criteria
Assign numerical values to evaluation dimensions
Scores determined by summing the products of numeric evaluations and weights

13. Profile Models Show risk/return options for projects. Maximum
Desired Risk
Minimum
Desired Return
Return
Risk X1 X3 X5 X6 X4 X2
Efficient Frontier
Criteria selection as axes
Rating each project on criteria

14. Financial Models Based on the time value of money principal
Payback period
Net present value
Internal rate of return
All of these models use discounted cash flows

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

16. 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 three years. What is the payback period?
Year
Cash Flow
Cumulative
($200,000) 1
$75,000
($125,000) 2
($50,000) 3
$25,000
*: the reciprocal of payback yields the average rate of return

17. Net Present Value
Projects the change in the firm’s stock value if a project is undertaken.
Higher NPV values are better!

18. 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.
Year
Net flow
Discount
NPV
-$60,000
1.0000
-$60,000.00 1
$15,000
0.9009
$13,513.51 2
0.8116
$12,174.34 3
0.7312
$10,967.87 4
0.6587
$9,880.96 5
0.5935
$8,901.77
-$4,561.54
The NPV column total is negative, so don’t invest!

19. Example 1) Payback Period 3.1 years 3.6 years 2) NPV
Present value of annual net cash inflows
Project A NPV=
=$54,235
Project B NPV=
=-$31,283

20. Internal Rate of Return
A project must meet a minimum rate of return before it is worthy of consideration.
Higher IRR values are better!

21. 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 15%; does this project meet the threshold?
Year
Net flow
Discount
NPV
-$40,000
1.0000
-$40,000.00 1
$14,000
0.8696
$12,173.91 2
0.7561
$10,586.01 3
0.6575
$9,205.23 4
0.5718
$8,004.55
-$30.30
This table has been calculated using a discount rate of 15%
The project doesn’t meet our 15% requirement and should not be considered further.

22. Project Charter Possible Elements Purpose Provides sponsor approval
Commits funding for the project
Summarizes key conditions and parameters
Establishes framework to develop baseline plan
Milestone schedule
Key assumptions
Constraints
Major risks
Approval requirements
Project manager
Reporting requirements
Sponsor designee
Approval signature
Project title
Purpose
Description
Objective
Success criteria or expected benefits
Funding
Major deliverables
Acceptance criteria

23. Project Charter example

24. Examine the project charter and comment on
Completeness of information
Describes the project that needs to be addressed
Lists requirements, constraints, assumptions, and risks
An RFP could be developed from the charter’s information
Possible evaluation criteria
Meets the purpose
Cost
Experience
Risks
Appropriate instructional strategies
Examine the project charter and comment on
Completeness of the information
Possible evaluation criteria

25. Preparing a Request for Proposal
Decision made to outsource to external resource
Comprehensively describe project requirements
Includes need, problem, or opportunity description
Allows contractors to develop a thorough proposal
Facilitates the development of evaluation criteria
May be communicated informally or formally, in writing or verbally

26. Guidelines for Developing an RFP
State project objective or purpose
Provide a statement of work
Include customer requirements
State deliverables the customer expects
State acceptance criteria
List customer supplied items
State approvals required
State type of contract
State payment terms
State schedule and key milestones
List format and content instructions
Indicate due date
Include evaluation criteria
Include level of effort or funds available

27. RFP example

28. Will AJACKS supply the names of the firms to be surveyed?
What manufacturing industries are the target?
What marketing information already exists?
What are the page limitations for the proposal and supplemental information?
What is an acceptable return rate on the survey?
Examine the RFP example. What additional questions need to be answered?

29. Homework
Q1:
Project A costs $90,000, will return $25,000 per year for five years.
Project B costs $80,000, will return $20,000 per year for five years.
You have an expected return of 8% and inflation to hold steady at 3% over the next five years.
Which project will you select based on NPV?
Q2 (Chapter 2, Q5): Which elements of a project charter would you use to help plan if you have a project that does not require a project charter? Why?
Q3 (Chapter 2, Q13): Develop an RFP for a real-world project such as landscaping the grounds surrounding a nearby business office, building a deck for your house, or holding a big graduation celebration. Be creative in specifying your needs. Fell free to come up with unique ideas for the RFP.