Project+ Study Notes 5 Flashcards
will vary depending on the mission of the organization, the people serving on the selection committee, the criteria used, and the project itself. These methods could include examining factors such as market share, financial benefits, return on investment, customer satisfaction, and public perception. The exact criteria vary, but selection methods usually involve a combination of decision models and expert judgment.
Project Selection Methods (b)
is a formal method of project selection that helps managers make decisions regarding the use of limited budgets and human resources.
Decision Model
uses a fixed set of criteria agreed on by the project selection committee to evaluate the project requests. By using the same model to evaluate each project request, the selection committee has a common ground on which to compare the projects and make the most objective decision. You can use a variety of decision models, and they range from a basic ranking matrix to elaborate mathematical models.
A Decision Model
provide a means to compare the benefits obtained from project requests by evaluating them using the same criteria. ??? are the most commonly used of the two categories of decision models. Four common benefit measurement methods are cost-benefit analysis, scoring model, payback period, and economic model.
Benefit Measurement Models
compares the cost to produce the product or service to the financial gain (or benefit) the organization stands to make as a result of executing the project. You should include development costs of the product or service, marketing costs, technology costs, and ongoing support, if applicable, when calculating total costs.
Cost-Benefit Analysis
has a predefined list of criteria against which each project is rated. Each criterion is given both a scoring range and a weighting factor. The weighting factor accounts for the difference in importance of the various criteria. Scoring models can include financial data, as well as items such as market value, organizational expertise to complete the project, innovation, and fit with corporate culture. Scoring models have a combination of objective and subjective criteria. The final score for an individual project request is obtained by calculating the rating and weighting factor of each criteria. Some companies have a minimum standard for the scoring model. If this minimum standard is not obtained, the project will be eliminated from the selection process. A benefit of the scoring model is that you can place a heavier weight on a criterion that is of more importance. Using a high weighting factor for innovation may produce an outcome where a project with a two-year time frame to pay back the cost of the project may be selected over a project that will recoup all costs in six months. The weakness of a scoring model is that the ranking it produces is only as valuable as the criteria and weighting system the ranking is based on. Developing a good scoring model is a complex process that requires a lot of interdepartmental input at the executive level.
Scoring Model
is a cash flow technique that identifies the length of time it takes for the organization to recover all the costs of producing the project. It compares the initial investment to the expected cash inflows over the life of the project and determines how many time periods elapse before the project pays for itself. ??? is the least precise of all the cash flow techniques discussed in this section.
Payback Period
is a series of financial calculations, also known as cash flow techniques, which provide data on the overall financials of the project.
Economic Model
is a cash flow technique that calculates the revenues or cash flows the organization expects to receive over the life of the project in today’s dollars. For example, let’s say your project is expected to generate revenues over the next five years. The revenues you receive in years 2, 3, and so on, are worth less than the revenues you receive today. ??? is a mathematical formula that allows you to determine the value of the investment for each period in today’s dollars.
Net Present Value (NPV)
compares the value of the future worth of the project’s expected cash flows to today’s dollars. For example, if you expected your project to bring in $450,000 in year 1, $2.5 million in year 2, and $3.2 million in year 3, you’d calculate the present value of the revenues for each year and then add up all the years to determine a total value of the cash flows in today’s dollars. Discounted cash flows for each project are then compared to other similar projects on the selection list. Typically, projects with the highest discounted cash flows are chosen over those with lower discounted cash flows.
Discount Cash Flow Technique
