Project selection methods are used to pick projects with maximum value to the organization.
Benefit measurement methods -
These methods compare possible projects and choose best projects. Example includes Murder Board, Peer Review, Scoring models, Economic models (PV, NPV, IRR, Payback period, Benefit Cost Ratio etc).
Constrained Optimization methods –
These methods perform mathematical calculations using various constraints and parameters to produce probability and outcome to choose projects. Examples include Linear programming, Integer Programming, Dynamic Programming, Multi-object programming.
- Present Value (PV) – Present Value of future Cash flows. Higher the better.
- Net Present Value (NPV) – Present value of future Cash inflows minus present value of future cash outflows. Higher the better.
- Internal rate of return (IRR) – Rate at which Future cash inflow is equal to future cash outflows. Higher the better.
- Pay back period – The time at which all the investment will be recovered. Earlier the better.
- Benefit Cost ratio – Higher the better.
Few more terms Project Managers should know
Economic Value Added (EVA) – Value added to organization by the project
Opportunity Cost – Profit lost when choosing one project over another.
Sunk Cost – Cost already incurred. This should not be taken into account while taking decision.
Law of Diminishing return – After a point, adding more resources will not have proportional benefit.
Working Capital – Current assets minus current liabilities.
Depreciation – Assets loose value over useful life.
