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.
Most-studied PMP concepts
High-yield topics our learners drill most before exam day.
Burndown Chart
A Burndown Chart is a graphical representation of work remaining versus time in a Sprint or release, showing whether the team is on track to complete the planned work.
Resource Leveling
Resource leveling is a resource optimization technique in which adjustments are made to the project schedule to keep resource usage at or below a defined limit, often resulting in a longer project duration.
Risk Register
The risk register is a project document that records the details of individual project risks, including their identification, analysis results, response plans, and current status.
Stakeholder Mapping
Stakeholder mapping is the visual representation of stakeholder relationships, influence, interest, or other attributes using grids, matrices, or diagrams to support analysis and engagement planning.
Relative Estimation
Relative Estimation is an agile technique where work items are sized in comparison to each other rather than in absolute units like hours or days, providing faster and more accurate estimates.
Cost Performance Index (CPI)
Cost Performance Index (CPI) is an EVM efficiency metric that measures cost performance as the ratio of earned value to actual cost: CPI = EV / AC.
Schedule Performance Index (SPI)
Schedule Performance Index (SPI) is an EVM efficiency metric that measures schedule performance as the ratio of earned value to planned value: SPI = EV / PV.
Earned Value Management (EVM)
Earned Value Management (EVM) is a methodology that integrates scope, schedule, and cost data to assess project performance and progress objectively.
Power/Influence Grid
The power/influence grid is a stakeholder classification model that groups stakeholders based on their level of authority (power) and their active involvement or ability to affect the project (influence).
Part of
Business Environment & Strategy
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