Discussion and responses (Executing the project)

Chapter3.ProjectSelectionandPortfolioManagement.pptx

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Project Management: Achieving Competitive Advantage

Fifth Edition

Chapter 3

Project Selection and Portfolio Management

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Learning Objectives

3.1 Explain six criteria for a useful project selection/screening model.

3.2 Understand how to employ a variety of screening and selection models to select projects.

3.3 Learn how to use financial concepts, such as the efficient frontier and risk/return models.

3.4 Identify the elements in the project portfolio selection process and discuss how they work in a logical sequence to maximize a portfolio.

P M B O K Core Concepts

Project Management Body of Knowledge (P M B o K) covered in this chapter includes:

Portfolio Management (P M B o K 1.4.2)

Project Selection

Screening models help managers pick winners from a pool of projects. Screening models are numeric or nonnumeric and should have:

Realism

Capability

Flexibility

Ease of use

Cost effectiveness

Comparability

Screening and Selection Issues (1 of 2)

Risk—unpredictability to the firm

a. Technical

b. Financial

c. Safety

d. Quality

e. Legal exposure

Commercial—market potential

a. Expected return on investment

b. Payback period

c. Potential market share

d. Long-term market dominance

e. Initial cash outlay

f. Ability to generate future business/new markets

Screening and Selection Issues (2 of 2)

Internal operating—changes in firm operations

a. Need to develop/train employees

b. Change in workforce size or composition

c. Change in physical environment

d. Change in manufacturing or service operations

Additional

a. Patent protection

b. Impact on company’s image

c. Strategic fit

All models only partially reflect reality and have both objective and subjective factors imbedded.

Approaches to Project Screening

Checklist model

Simplified scoring models

Analytic hierarchy process

Profile models

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 stimulating discussion.

Simplified 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

Relative scores can be misleading!

Analytic Hierarchy Process

The A H P is a four step process:

Construct a hierarchy of criteria and subcriteria.

Allocate weights to criteria.

Assign numerical values to evaluation dimensions.

Determine scores by summing the products of numeric evaluations and weights.

Unlike the simple scoring model, these scores can be compared!

Figure 3.1 Sample A H P with Rankings for Salient Selection Criteria

Figure 3.4 Profile Model

Financial Models

Payback period

Net present value

Discounted payback period

Internal rate of return

Payback Period

Determines how long it takes for a project to reach a breakeven point.

Cash flows should be discounted.

Lower numbers are better (faster payback).

Payback Period Example (1 of 3)

Table 3.5 Initial Outlay and Projected Revenues for Two Project Options

Blank	Project A Revenues	Project A Outlays	Project B Revenues	Project B Outlays
Year 0	Blank	$500,000	Blank	$500,000
Year 1	$50,000	Blank	$75,000	Blank
Year 2	150,000	Blank	100,000	Blank
Year 3	350,000	Blank	150,000	Blank
Year 4	600,000	Blank	150,000	Blank
Year 5	500,000	Blank	900,000	Blank

Payback Period Example (2 of 3)

Table 3.6 Comparison of Payback for Projects A and B

Payback Period Example (3 of 3)

Table 3.6 [continued]

Net Present Value

Projects the change in the firm’s value if a project is undertaken.

Where

Ft = net cash flow for period t

r = required rate of return

I = initial cash investment

pt = inflation rate during period t

Higher N P V values are better!

Net Present Value Example

Table 3.8 Discounted Cash Flows and N P V (I)

Table 3.9 Discounted Payback Method

Year	Project Cash Flow* Discounted	Undiscounted
1	$8,900	$10,000
2	7,900	10,000
3	7,000	10,000
4	6,200	10,000
5	5,500	10,000
Payback Period	4 Years	3 Years

*Cash flows rounded to the nearest $100.

Discount sum of cash flows by the company’s required rate of return to get a more accurate payback period.

Internal Rate of Return

A project must meet a minimum rate of return before it is worthy of consideration.

Higher I R R values are better!

where

A C F t = annual after tax cash flow for time period t

I O = initial cash outlay

n = project’s expected life

I R R = the project’s internal rate of return

Internal Rate of Return Example

This table has been calculated using a discount rate of 15%.

Year	Discount Factor Inflows	Discount Factor at 15%	Discount Factor N P V
1	$2,500	.870	$2,175
2	2,000	.756	1,512
3	2,000	.658	1,316
Present value of inflows	Blank	Blank	5,003
Cash investment	Blank	Blank	5,000
Difference	Blank	Blank	$ 3

The project does meet our 15% requirement and should be considered further.

Project Portfolio Management

The systematic process of selecting, supporting, and managing the firm’s collection of projects.

Portfolio management objectives and initiatives require:

decision making

prioritization

review

realignment

reprioritization of a firm’s projects

The Portfolio Selection Process

The portfolio selection process is an integrated framework of interrelated steps and activities.

Preprocess Phase

Methodology of selection and strategy

Process Phase

Prescreening, individual project analysis, screening, portfolio selection, and portfolio adjustment

Postprocess Phase

Project development, project evaluation, and portfolio completion

Figure 3.8 Project Portfolio Selection Process

Developing a Proactive Portfolio

The project portfolio matrix classifies projects into four types according to commercial potential and technical feasibility:

Bread and butter

Pearls

Oysters

White elephant

Figure 3.9 Project Portfolio Matrix

Keys to Successful Project Portfolio Management

Flexible structure and freedom of communication

Low-cost environmental scanning

Time-paced transition

Problems in Implementing Portfolio Management

Conservative technical communities

Out-of-sync projects and portfolios

Unpromising projects

Scarce resources

Summary

Explain six criteria for a useful project selection/screening model.

Understand how to employ a variety of screening and selection models to select projects.

Learn how to use financial concepts, such as the efficient frontier and risk/return models.

Identify the elements in the project portfolio selection process and discuss how they work in a logical sequence to maximize a portfolio.

=´

Score(Weight Score)

Investment

Payback Period

Annual Cash Savings

(1)

NPVI

ACF

IRR

()