Project Selection

Content Copyright © 2010 Valenti Partners. All rights reserved. Course content Content Copyright © 2010 Valenti Partners. All rights reserved. Course content

is copyrighted and may not be copied or reproduced without written permissionis copyrighted and may not be copied or reproduced without written permission..11

An Introduction to Project An Introduction to Project Selection TechniquesSelection Techniques

Andrew P. Valenti, MSc.,PMPAndrew P. Valenti, MSc.,PMPValenti PartnersValenti Partners

www.valentipartners.comwww.valentipartners.com

Content Copyright © 2010 Valenti Partners. All rights reserved. Content Copyright © 2010 Valenti Partners. All rights reserved. Course content is copyrighted and may not be copied or Course content is copyrighted and may not be copied or

reproduced without written permission.reproduced without written permission.

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What is Project Selection?What is Project Selection?

The act of choosing a project from among The act of choosing a project from among competing proposals.competing proposals.

Example: Integrating customer and financial Example: Integrating customer and financial databases.databases.

Project Selection Steering CommitteeProject Selection Steering Committee Scoring criteria include:Scoring criteria include:

• Links to the strategic goal of increased Links to the strategic goal of increased technological advantage.technological advantage.

• Can be produced using only internal resources.Can be produced using only internal resources.• Meets goal of increasing new sales revenue by Meets goal of increasing new sales revenue by

10%.10%.



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Project Selection MethodsProject Selection Methods Scoring ModelScoring Model

• Committee begins evaluation processCommittee begins evaluation process• Evaluates projects by using a set of criteria with Evaluates projects by using a set of criteria with

a weight (score) assigned to a criteriaa weight (score) assigned to a criteria• Proposals are prioritized by score.Proposals are prioritized by score.

Example: Opportunity to implement two Example: Opportunity to implement two new projects but has resources for only one new projects but has resources for only one by the end of a fiscal year.by the end of a fiscal year.

Prioritization based on:Prioritization based on:• Projected cost analysis.Projected cost analysis.• Projected duration analysis.Projected duration analysis.• Projected financial benefits analysis.Projected financial benefits analysis.



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Decision ModelsDecision Models

System Description

Benefit Measurement Models (Economic Models)

Analyze the predicted value of the completed projects in different ways.May present the value in terms of: Benefit Cost Ratio (BCR) Return on Investment (ROI) Present Value (PV) & Net Present Value (NPV) Internal Rate of Return (IRR) Opportunity Cost

Mathematical Models (Constrained Optimization)

Uses different types of mathematical formulas and algorithms to determine the optimal course of action. Linear programming Nonlinear programming Dynamic programming Integer Programming Multi-objective programming



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Decision Models, cont.Decision Models, cont.

Benefit Cost Ratio (BCR)Benefit Cost Ratio (BCR) Benefit / CostBenefit / Cost Benefit is the expected monetary reward Benefit is the expected monetary reward

created by the deliverablecreated by the deliverable The greater the value, the better the The greater the value, the better the

project. For benefit to exceed cost, BCR project. For benefit to exceed cost, BCR >1>1

ExampleExample• Projected project cost = $20,000Projected project cost = $20,000• Expect to sell it for $60,000Expect to sell it for $60,000• BCR = $60,000/$20,000 = 3BCR = $60,000/$20,000 = 3



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Return on Investment (ROI)Return on Investment (ROI) The percentage profit for the projectThe percentage profit for the project ExampleExample

• Projected project cost = $400,000Projected project cost = $400,000• Benefit for first year = $500,000Benefit for first year = $500,000• ROI = $500,000 - $400,000/$400,000 ROI = $500,000 - $400,000/$400,000

= 25%= 25%



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Cash FlowCash Flow Considers money coming in and going out Considers money coming in and going out

of an organizationof an organization Positive cash flow means more money Positive cash flow means more money

coming in than going outcoming in than going out Cash inflow is benefit (income), and cash Cash inflow is benefit (income), and cash

outflow is cost (expenses)outflow is cost (expenses) Goal is to select projects with a positive Goal is to select projects with a positive

cash flowcash flow Cash flow is the basis for more advanced Cash flow is the basis for more advanced

economic modelseconomic models



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Discounted Cash FlowDiscounted Cash Flow Cash flow models are fine for short-Cash flow models are fine for short-

term, low expense projects.term, low expense projects. For longer term, higher expense For longer term, higher expense

projects, we consider the time value projects, we consider the time value of money.of money.

The amount that we anticipate The amount that we anticipate receiving from future cash flows is receiving from future cash flows is worth less in today’s dollars.worth less in today’s dollars.



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Decision Models, cont.Decision Models, cont.Discounted Cash Flow ExampleDiscounted Cash Flow Example A project will be earning $160,000/yr in five A project will be earning $160,000/yr in five

years. If the APR = 6%, what’s the cash flow years. If the APR = 6%, what’s the cash flow worth today?worth today?

Cash flow is worth $119,561 (in today’s dollars)Cash flow is worth $119,561 (in today’s dollars) This is the Present Value (PV)This is the Present Value (PV) Expected future cash flow is worth $160,000Expected future cash flow is worth $160,000 This is the Future Value (FV)This is the Future Value (FV) PV = FV / (1 + I)PV = FV / (1 + I)nn

• n = number of periods (years in the case)n = number of periods (years in the case)• i = interest rate (APR)i = interest rate (APR)• PV = 160,000 / (1 + .06)PV = 160,000 / (1 + .06)55

If you are looking at two proposed projects, the If you are looking at two proposed projects, the project with the highest PV is usually the best project with the highest PV is usually the best choicechoice



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Decision Models, cont.Decision Models, cont.Net Present ValueNet Present Value What if we have longer term projects with What if we have longer term projects with

deliverables at periodic intervals?deliverables at periodic intervals? More sophisticated model than single More sophisticated model than single

period discounted cash flow is neededperiod discounted cash flow is needed Need to look at PV of the cash flow for Need to look at PV of the cash flow for

each benefit period of the projecteach benefit period of the project Using the approach we can find the Using the approach we can find the

project’s Net Present Value (NPV)project’s Net Present Value (NPV) Most multi-year projects are organized to Most multi-year projects are organized to

deliver an ROI in each year the project deliver an ROI in each year the project lastslasts



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Decision Models, cont.Decision Models, cont.Multi-year project NPV ExampleMulti-year project NPV Example

• A retail chain is upgrading each set of stores in A retail chain is upgrading each set of stores in a geographic market. a geographic market.

• As each store upgrades, the project As each store upgrades, the project deliverables will be generating cash flow.deliverables will be generating cash flow.

• Thus the project can begin earning money as Thus the project can begin earning money as soon as the first store is upgraded.soon as the first store is upgraded.

• Finding the Net Present ValueFinding the Net Present Value Calculate the CF and PV for each project period.Calculate the CF and PV for each project period. Sum up the PV for all of the periods.Sum up the PV for all of the periods. NPV = PV – Investment in the ProjectNPV = PV – Investment in the Project A project with an NPV > 0 is goodA project with an NPV > 0 is good



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Decision Models, cont.Decision Models, cont.Opportunity CostOpportunity Cost By spending this dollar on the chosen By spending this dollar on the chosen

project, you are passing up an project, you are passing up an opportunity to spend it on another opportunity to spend it on another projectproject

This is the selected project’s This is the selected project’s opportunity cost.opportunity cost.



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Decision Models, cont.Decision Models, cont.Opportunity Cost ExampleOpportunity Cost Example You’ve been offered a project B that You’ve been offered a project B that

will earn you a profit of $100,000 in will earn you a profit of $100,000 in three monthsthree months

You have an offer of a project A that You have an offer of a project A that will earn you a profit of $70,000 in will earn you a profit of $70,000 in three months.three months.

You can only do one projectYou can only do one project Which one would you choose?Which one would you choose?



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Decision Models, cont.Decision Models, cont.Opportunity Cost ExampleOpportunity Cost Example What is the opportunity cost of Project A?What is the opportunity cost of Project A?

• $100,000$100,000 What is the opportunity cost of Project B?What is the opportunity cost of Project B?

• $70,000$70,000 Project B is selected since it has the Project B is selected since it has the

smaller opportunity costsmaller opportunity cost Opportunity cost is but one project Opportunity cost is but one project

selection criteriaselection criteria• There might be other criteria to consider, e.g. There might be other criteria to consider, e.g.

scoring modelscoring model• Project steering committee determines Project steering committee determines

selection methods and processselection methods and process



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Summary Projects are selected to meet some underlying

set of business objectives in the strategic plan Typically, a project steering committee

consisting of senior executives from each functional department selects the methods and processes used to evaluate project proposals

Three categories of methods are available:1. Benefit measurement method2. Constrained optimization or mathematical models3. Scoring Models

These methods can be used alone or in combination as determined by the project steering committee



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Who We AreAndy Valenti, MSc, PMPContact [email protected]

Andy is the founder and senior consultant of Valenti Partners, a provider of project management solutions. Andy is currently part of the adjunct faculty of Northeastern University and teaches a variety of graduate-level project management courses.

For more than 25 years, Andy has provided market research, technology audits, build/buy analysis, new product development, project management, and business development services to financial information vendors, investment management companies, brokerage houses, health care, and non-profit institutions.

He holds a MS in Computer Science from Courant Institute, New York University.

mailto:[email protected]

Project Selection

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