Effective project management needs finding a project which is a perfect match for the combined skillset of your team. The project must also match the team’s competence level. If all these are done, then chances of success are much more increased.
The project selection techniques provide seven time-tested techniques. All seven methods are based on logical reasoning. It helps to select the best project. Undesirable projects, those that have near zero chances of success, are weeded out.
Methods to choose Project of the Year
The project which has the potential to deliver maximum profits should be made Project of the Year. Ideally, you should do all the projects. However, resource constraints dictate that all projects cannot be taken up. A crucial decision should be taken on the light of which project will generate the maximum quantum of money.
Project selection methods are applied at this juncture. A number of techniques are available to assist you to select a project. The methods can be demarcated into two kinds: Constrained Optimization Methods and Benefit Measurement Methods.
The Benefit Measurement Methods
This project selection method is based on the present value of anticipated cash inflow along with outflow. The cost benefits are calculated. They are then contrasted with a number of other projects to arrive at a decision. The techniques used in Benefit Measurement are:
1.Benefit/cost ratio or cost/benefit ratio
This, as its name suggests, is the ratio between the Present Inflow Value to Present Outflow Value. The former is the cost invested in any project and the latter is the project’s value return. Preferred projects are those which have more Benefit Cost Ratio or lower Cost Benefit Ratio
2. Economic model
The Economic Value Added or EVA is a performance metric which calculates the organization’s worth creation and also defines its capital return. Another definition of EVA is net profit after capital expenditure and taxes are deducted. EVA is expressed in numeric and not percentage
3. Scoring model
This is an objective method where the committee for project selection lists the relevant criterion. The committee then weighs each criterion as per priorities and importance. The weighted values are then added. Once everything is completed, the project with the highest score is selected.
4. Payback period
This is the ratio of total cash to average cash per period. In other words, it is the time required to recover the project’s investment.
5. Net Present Value or NPV
This is the difference between cash inflow’s present value and cash outflow’s present value. This NPV must be positive at all times. If there are multiple projects, choose one with higher NPV.
6. Discounted cash flow
It is a fact that money’s future value will vary from what it is at present. To account for this, the discounted cash flow must be taken into consideration when ROI and cost investment are calculated.
7. Internal rate of return
This is the rate of interest where NPV is zero. The state gets attained when present outflow value equals present inflow value.
Other than these seven major factors, opportunity costs and constrained optimization methods are also taken into consideration when selecting a project. Constrained optimization methods are usually used for selecting complex projects that include a lot of complicated mathematical calculations. Hence, it is also termed as the mathematical model for selecting projects. Dynamic, integer, linear and non-linear programming are the techniques included in this project selection model.
By choosing the right projects, organizations would be able to prevent unnecessary wastage of time and resources and increase their ROI.