Lecture 5 - Project Evaluation and Decision Making

Question 1

What to do when making decisions?

Answer 1

• How to compare options fairly and with transparency?

Question 2

Option Evaluation & Criteria

Answer 2

REFER TO SLIDES FOR EXAMPLE IMAGE/TABLE

Question 3

What are the 5 Steps for Project Evaluation & Decision Making

Answer 3

1. Define decision criteria
2. Define the base case
3. Collect data against each criteria for the base and alternate cases
4. Calculate $ values for financial criteria and explore sensitivities
5. Check appropriate risks have been evaluated
6. Evaluate your base case and options against the decision criteria

Question 4

Define decision criteria

Answer 4

• A decision should be made after considering the base case and alternate options against a set of relevant decision criteria using an appropriate approach.
• When more than one criteria is used, this is described as a multiple-criteria decision.
• In practice criteria may be quantifiable (e.g. NPV, cost) and others qualitative in nature (e.g. some risk measures).

Question 5

What are some Questions to ask when selecting decision criteria?

Answer 5

• Did you identify, select and characterise the decision criteria BEFORE the comparing alternative project options?
• Are your criteria independent of each other?
• Do you have a reasonable minimum of criteria?
• Is it appropriate and possible to rank the criteria?

Question 6

What is the base case?

Answer 6

• The base case is the as-is or do nothing situation.
• It is important that options for all projects are evaluated against a clearly defined base case.
• We often overlook the “do nothing” option

Question 7

What are the Costs and benefits in the base case?

Answer 7

Projects should be initiated only if:
* The estimated benefits outweigh their costs
* There is adequate compensation (return) for the risks associated with the project.

Question 8

Why do you need to select an appropriate metrics for $ cost

Answer 8

• While the NPV is the yardstick measure against which many projects are evaluated. Other measures such as payback period, EAC and IRR may also be
  important.
• It is good practice to display various options graphically either to compare with each other, or for a specific option to see how values vary over time.

Question 9

What are the yypes of net benefits?

Answer 9

• Three typical categories
  – Those that can be readily quantified in $ terms e.g. capital and maintenance cost savings
  – Effects that can identified, measured but not quantified into dollar terms
  – Effects that are known to exist but cannot be readily or accurately identified.

Question 10

What are some examples of indirect/ intangible benefits?

Answer 10

• Increased business opportunities
• Improved social well being
• Increased economic activity
• Customer loyalty
• Improved public perception
• Reduced likelihood or consequence levels