Project Selection and
Portfolio Management
Chapter 3
© 2007 Pearson Education
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Introduction
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Select project from many opportunities.
What criteria to determine
Which project should be supported
Not simple decision
Consequences of poor decision making (expensive)
Realm of information technology
How to make reasonable choices in selecting project?
What kind of information to collect?
Should decision be based on financial and non financial?
Number of different approaches for evaluating and selecting
potential projects.
• Qualitative and quantitative approaches with merits and
demerits.
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Project management questions
• What activities are required to complete a
project and in what sequence should they be
carried out?
• When should each activity be scheduled to
begin and end?
• Which activities are critical to completing the
project on time?
• What is the probability of meeting the project
completion due date?
• How should resources be allocated to
activities?
Project Management
Integration
Management
Cost
Management
Communications
Management
Scope
Management
Quality
Management
Risk
Management
Time
Management
Human
Resource
Management
Procurement
Management
Project Plan Development Workflow
• Initial Project
Information
• Create Project WBS
• List Major Milestones
• Develop Sequence of
Activities
• Create Resource
Pool
• Develop Initial
Budget and Schedule
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Review Schedule
Review Budgets
Submit to Finance
Fine Tune Budget and
Schedule
• Generate Reports and
Graphics
• Submit Proposal to
Key
stakeholders/Client
Project selection criteria can be:
• Financial
– Net present value, benefit/cost, return on
investment, payback period, etc
• Non-financial
– Requires other criteria beyond financial returns
– Developing and maintaining core competencies
– Builds image and social responsibility
Project definition
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Who
What
Where
Why
When
Outputs from planning
• Initial project
information
• Project WBS
• List major milestones
• Sequence of
activities
• List of resource pool
• Initial budget and
schedule
• Reviewed schedule
• Reviewed budgets
• Stakeholders’
responses
Project Selection
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Firms are bombarded with opportunities
But no infinite resources available
Choices are always made
So firms select viable projects
They uses priority system
Balancing between opportunity and cost
Times and cost is always crucial elements and
effect major decision
• Decisions are successful when they are made
timely and efficiently
• Example of marketing
• Organizations use selection models.
Project Selection
Numbers of decision models are available to firm.
Screening models (set of models) allow to make
best choice/help managers pick winners from a
pool of projects.
Realism(organizational objective, human and
financial resources, commercial and technical
risk, performance, cost and time)
Capability (flexible to respond changes under
condition,
compare
different
types
of
projects(long-term and short term different
technologies
and
capabilities,
different
commercial objectives robust enough to
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accommodate new criteria)
Continued……..
Flexibility( model should be easily modified if trail
applications require changes. Allow for
adjustment tax, rates, exchange rates, laws
Ease of use (used by all areas of the organization
Cost effectiveness, specific project roles, or
functional positions, choices made for selection
of project and reasons for those choices must be
clear and understood by each member. The
model should generate screening information
rapidly, and people assimilate info without
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special training.
Continued…….
Cost (cost, effective, selection is expensive in terms of
time and cost, might have worst effect, organizational
member may avoid to use due high cost of screening,
the cost of generating information and optimal results
should be low to chooses model rather than diminish
their applicability)
Comparability (it must be broad to applied multiple
projects, too narrowly focused model may be useless
in comparing other potential projects, good model
should support general project objectives.
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Continued…………………..
Screening models are numeric or nonnumeric
and should have:
Numeric seek to use numbers as input for decision
process. These values can be derived
objectively or subjectively.
Bridge construction
Software development
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Screening & Selection Issues
• Risk – factors reflect unpredictability to the firm
Technical risk: risk due to development of new
technologies
Financial risk: caused by investing in projects
Safety risk: risk to the well being of users or developers
of project.
Quality risk: risk to firm’s good will, or reputation, due
to quality of completed projects.
Legal exposure:
potential for law suit or legal
obligations.
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continued,…………………………..
• Commercial – factors that reflect the market
potential of the project
– Expected rate of return
– Pay back period
– Potential market share
– Long term market dominance
– Initial cash outlay
– Ability to generate future venture
3-15
Continued………………
• Internal operating – changes in firm’s
operating issues, factors refers to impact of the
project on internal operations.
– Need of development of employees through
training
– Changes in workforce size or composition
– Changes in physical environment
– Changes in manufacturing or services
operation
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• Additional – image, patent protection, startegic
fit, etc.
All models only partially reflect reality and have
both objective and subjective factors
imbedded
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Approaches to Project Screening
1. Checklist
2. Simple scoring models
3. Analytic hierarchy process
4. Profile models
5. Financial models
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Checklist Model
A checklist is a list of criteria applied to possible
projects.
 Requires agreement on criteria
 Assumes all criteria are equally important
Checklists are valuable for recording opinions
and encouraging discussion
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Continued….
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Cost of development
Potential return on investment
Riskiness of new venture
Stability of the development process
Governmental stakeholder interference
Product durability and future market potential.
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3.1 SIMPLIFIED CHECKLIST MODEL FOR PROJECT SELECTION
Performance on Criteria
High
Project
Criteria
Project Alpha
Cost
Profit Potential
Time to Market
Development Risks
Project Beta
Project Gamma
Project Delta
Cost
Profit Potential
Time to Market
Development Risks
Cost
Profit Potential
Time to Market
Development Risks
Cost
Profit Potential
Time to Market
Development Risks
Medium
Low
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
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Simple Scoring Models
Each project receives a score that is the
weighted sum of its grade on a list of criteria.
Scoring models require:
 agreement on criteria
 agreement on weights for criteria
 a score assigned for each criteria
Score   (Weight  Score)
Relative scores can be misleading!
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Simple Scoring
3.2 SIMPLE SCORING MODEL
Project
Criteria
(A)
Importance
Weight
Score
(A) x (B)
Weighted
Score
(B)
Project Alpha
Cost
1
3
3
Profit Potential
2
1
2
Development Risk
2
1
2
Time to Market
3
2
6
13
Total Score
Project Beta
Cost
1
2
2
Profit Potential
2
2
4
Development Risk
2
2
4
Time to Market
3
3
9
Total Score
simple scoring.xlsx
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Analytic Hierarchy Process
The AHP is a four step process:
1. Construct a hierarchy of criteria and subcriteria
2. Allocate weights to criteria
1. Weights sum to 1 (normalized)
3. Assign numerical values to evaluation
dimensions
4. Scores determined by summing the products of
numeric evaluations and weights
Unlike the simple scoring model, these scores3-24
are comparable!
Step 1& 2
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Step 3 & 4
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Financial Models
Based on the time value of money principal
o
o
o
o
Payback period
Net present value
Internal rate of return
Options models
All of these models use discounted cash flows
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Continued…………………………
Discounted cash flow (DCF) is a
valuation method used to estimate the
value of an investment based on its
future cash flows. ... If the value
calculated through DCF is higher than
the current cost of the investment, the
opportunity should be considered.
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Payback Period
Determines how long it takes for a project to
reach a breakeven point
Investment
Payback Period 
Annual Cash Savings
Cash flows should be discounted
Lower numbers are better (faster payback)
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Payback Period Example
A project requires an initial investment of $200,000 and
will generate cash savings of $75,000 each year for the
next five years. What is the payback period?
Year
Cash Flow
Cumulative
0
($200,000)
($200,000)
1
$75,000
($125,000)
2
$75,000
($50,000)
3
$75,000
$25,000
Divide the cumulative
amount by the cash
flow amount in the
third year and subtract
from 3 to find out the
moment the project
breaks even.
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25,000
3
 2.67 years
75,000
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Net Present Value
• The value in the present of a sum
of money, in contrast to some
future value it will have when it
has been invested at compound
interest.
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Net Present Value Example
Should you invest $60,000 in a
project that will return $15,000
per year for five years? You have
a minimum return of 8% and
expect inflation to hold steady at
3% over the next five years.
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Net Present Value
Projects the change in the firm’s stock value if a
project is undertaken.
Ft
NPV  I o  
(1  r  pt )t
where
Ft = net cash flow for period t
R = required rate of return
I = initial cash investment
Higher NPV
values are
better!
Pt = inflation rate during period t
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Net Present Value Example
Discount
Discounted
Flow
Year
Net flow
0
-$60,000
1.0000
-$60,000.00
1
$15,000
0.9009
$13,513.51
2
$15,000
0.8116
$12,174.34
3
$15,000
0.7312
$10,967.87
4
$15,000
0.6587
$9,880.96
5
$15,000
0.5935
$8,901.77
npv.xls
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Net Present Value Example
Discount
Discounted
Flow
Year
Net flow
0
-$60,000
1.0000
-$60,000.00
1
$15,000
0.9009
$13,513.51
2
$15,000
0.8116
$12,174.34
3
$15,000
0.7312
$10,967.87
4
$15,000
0.6587
$9,880.96
5
$15,000
0.5935
$8,901.77
-$4,561.54
The NPV
column total
is -$4561, so
don’t invest!
npv.xls
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Internal Rate of Return
• The internal rate of return (IRR) is
a metric used in capital budgeting to
estimate the profitability of potential
investments. The internal rate of
return is a discount rate that makes
the net present value (NPV) of all
cash flows from a particular project
equal to zero.
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Internal Rate of Return
• Method for evaluating the
expected outlays and income
associated with new project
investment opportunity.
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Internal Rate of Return
A project must meet a minimum rate of return
before it is worthy of consideration.
t
ACFt
IO  
n 1 (1  IRR )t
where
Higher IRR
values are
better!
ACFt = annual after tax cash flow for time period t
IO = initial cash outlay
n = project's expected life
IRR = the project's internal rate of return
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Internal Rate of Return Example
A project that costs $5,000 will generate cash flows
of $ 2500, 2000, 2000 for the next three years. You
have a rate of return requirement of 15%; does this
project meet the threshold?
Year
Net flow
Discount
rate at
15%
NPV
1
2500
.870
2,175
2
2000
.756
1, 512
3
2000
.658
1,316
5,250/ 5003
(5000)
250/3
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Continued……..
i- Initial Investment. Cash flows= Cash
flows in the time period. r = Discount
rate. i = time period.
NPV = (Cash flows)/( 1+r)i.
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Options Models
NPV and IRR methods don’t account for failure
to make a positive return on investment.
Options models allow for this possibility.
Options models address:
1. Can the project be postponed?
2. Will future information help decide?
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Option Example
• Premise
– $300,000 investment with 12% ERR and 10 year life
• Step one
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–
–
–
Calculate NPV using known spread of risk
50% chance of $100,000
50% chance of $10,000
0.5*$100,000+0.5*$10,000 = $55,0000/year
• Step two
–
–
–
–
Wait for more info to improve spread of risk
70% chance of $100,000
30% chance of $10,000
0.7*$100,000+0.3*$10,000 = $73,0000/year
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Project Portfolio Management
The systematic process of selecting, supporting,
and managing the firm’s collection of projects.
Portfolio management requires:
decision making
prioritization
review
realignment
reprioritization
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Keys to Successful
Project Portfolio Management
Flexible structure and freedom of
communication
Low-cost environmental scanning
Time-paced transition
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Problems in Implementing
Portfolio Management
 Conservative technical communities
 Out of sync projects and portfolios
 Unpromising projects
 Scarce resources
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GE Model
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ElephantX Model
• A 9 Step process
The 9 steps to successful project
implementation
From BD to Operations
• 20 questions
• Project guide
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