Project Selection Methods
Project selection methods are the techniques organizations use to evaluate and choose which projects to pursue, including mathematical models (NPV, IRR, BCR) and comparative approaches (scoring models, peer review).
Explanation
Organizations have limited resources and must choose which projects to fund. Project selection methods provide objective frameworks for making these decisions. They fall into two broad categories: mathematical (or constrained optimization) models and benefit measurement (comparative) methods.
Mathematical models use financial calculations like net present value, internal rate of return, benefit-cost ratio, payback period, and return on investment to quantify a project's economic attractiveness. Benefit measurement methods include scoring models, peer reviews, murder boards, and multi-criteria decision analysis. In practice, organizations often combine both approaches.
For the exam, know the key financial selection methods and when each is most useful. Understand that project selection is a portfolio management activity that happens before a project manager is typically assigned. Questions may present scenarios with financial data and ask which project should be selected.
Key Points
- •Two broad categories: mathematical models and benefit measurement methods
- •Financial models include NPV, IRR, BCR, payback period, and ROI
- •Benefit measurement methods include scoring models and multi-criteria analysis
- •Project selection is a portfolio management responsibility
Exam Tip
When comparing projects using financial metrics, higher NPV, higher BCR, and higher IRR generally indicate a more attractive project. Shorter payback period is also preferred.
Frequently Asked Questions
Related Topics
Net Present Value (NPV)
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time, used to assess the profitability of a project or investment.
Internal Rate of Return (IRR)
The internal rate of return (IRR) is the discount rate at which the net present value of all cash flows from a project equals zero, representing the project's expected annualized rate of return.
Return on Investment (ROI)
Return on investment (ROI) is a financial metric that measures the percentage gain or loss generated by an investment relative to its cost, calculated as (Net Profit / Cost of Investment) x 100.
Benefit-Cost Ratio (BCR)
The benefit-cost ratio (BCR) is a financial metric that compares the present value of benefits to the present value of costs, expressed as a ratio, to determine whether a project's benefits outweigh its costs.
Payback Period
The payback period is the length of time required for an investment to recover its initial cost from the net cash inflows it generates.
Test your knowledge
Practice scenario-based questions on this topic with detailed explanations.