Project Evaluation and Selection

GROUP 1

What is a Project?
A project is an investment activity where we expend

capital resources to create a producing asset from which we can expect to realize benefits over an extended period of time.

Project Evaluation and Selection

Selection of the right project is crucial decision for long-

term survival of the company.

A process is required to select and rank projects on the

basis of beneficial change to the company.

Evaluation/Selection tasks include Evaluate a single project Select one project from a set of projects Select a portfolio of projects from a set of projects

Methods for Evaluation/Selection

Evaluation/Selection without formal modelling

Numerical Models Profit/Profitability Scoring

Simulation and probabilistic models

Why models?

Cannot make decisions Cannot be held responsible for decisions Do not produce results exactly analogous to reality

Without Formal Modelling

Operating Necessity

Competitive Necessity
Comparative Benefits Existing Product Line Extension

Someone Powerful Enough says so

Numeric Models

Financial models Payback period Return on investment Net present value Internal rate of return

Scoring models

Pay Back period

The Number of Years required for the project to

repay its initial fixed investment. The time period is usually expressed in years and months. It reduces the projects exposure to risk and uncertainty by selecting the project that has shortest payback period.

Return on investment
This method first calculates the average annual profit,

which is simply the project outlay deducted from the total gains, divided by number of years the investment will return. outlay using following equations:

The profit is then converted into a percentage of the total

Avg annual profit= Total gains- total outlay No. of years Return on investment= Avg annual profit x 100 Original investment

Discounted cash flow

This technique takes into consideration the time value of

money.
There are two basic DSF techniques that can model this

effect,

net present value (NPV) internal rate of return (IRR)

These discounting techniques enable the project manager

to compare two projects with different investment and cash flows profiles.

Net Present Value(NPV)

NPV is a measure of the value or worth added to the company by

carrying out the project

If the NPV is positive the project merits further consideration. When ranking the projects, preference should be given to the

projects with highest NPV.

It introduces the time value of money

It expresses all future cash-flows in todays values, which enables

direct comparisons
It allows for inflation and escalation

Internal rate of return

The internal rate of return is called DCF yield The IRR is the value of the discount factor when the NPV is zero. The IRR is calculated by either a trial and error method or plotting

NPV against IRR.

It is assumed that the costs are committed at the end of the year and

these are the only costs during the year.

IRR analysis is a measure of the return on investment, therefore,

select the project with highest IRR.

Scoring Models
This is also called factor model It simply lists a number of desirable factors on a project

selection proforma along with coloumns for selected and not selected.
The factors can be weighted columns can be added to increase

the scores of important factors while reducing the scoring of the less important.
The factors can be weighted simply 1 to 5.