Explanation: Selection MethodsThere are various project selection methods practiced by the modern business organizations. These methods have different features and characteristics. Therefore, each selection method is best for different organizations. Although there are many differences between these project selection methods, usually the underlying concepts and principles are the same.
Following is an illustration of two of such methods (Benefit Measurement and Constrained Optimization methods).
As the value of one project would need to be compared against the other projects, you could use the benefit measurement methods. This could include various techniques, of which the following are the most common.
• You and your team could come up with certain criteria that you want your ideal project objectives to meet. You could then give each project scores based on how they rate in each of these criteria, and then choose the project with the highest score.
• When it comes to the Discounted Cash flow method, the future value of a project is ascertained by considering the present value and the interest earned on the money. The higher the present value of the project, the better it would be for your organization.
• The rate of return received from the money is what is known as the IRR. Here again, you need to be looking for a high rate of return from the project.
The mathematical approach is commonly used for larger projects. The constrained optimization methods require several calculations in order to decide on whether or not a project should be rejected.
Cost-benefit analysis is used by several organizations to assist them to make their selections. Going by this method, you would have to consider all the positive aspects of the project, which is the benefits, and then deduct the negative aspects (or the costs) from the benefits. Based on the results you receive for different projects, you could choose which option would be the most viable and financially rewarding.
These benefits and costs need to be carefully considered and quantified in order to arrive at a proper conclusion. Questions that you may want to consider asking are in the selection process are:
1. Would this decision help me to increase organizational value in the long run?
2. How long will the equipment last for?
3. Would I be able to cut down on costs as I go along?
In addition to these methods, you could also consider Choosing based on opportunity cost - When choosing any project, you would need to keep in mind the profits that you would make if you do decide to go ahead with the project.
Profit optimization is therefore the ultimate goal. You need to consider the difference between the profits of the project you are primarily interested in, and the next best alternative.
