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Project Management
Chapter 3
Project Selection and Portfolio Management
Professor Ayman Abdallah
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 01-02

Project Selection
 Many companies use screening models that allow
them to make the best choices among alternative
projects.
 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 & Selection Issues
(Some factors that can be considered when evaluating project
alternatives)
 Risk – unpredictability to the firm

 Commercial – market potential
 Internal operating – changes in firm operations
 Additional – image, patent, fit, etc.
All models only partially reflect reality and

have both objective and subjective factors
imbedded

Approaches to Project Screening
Checklist model
Simplified scoring models
Profile models
Financial models

1) 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

1) Checklist Model

2) Simplified Scoring Models
 In this model, each criterion is ranked according to its
relative importance (weight), and the project overall
score is calculated
 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)

2) Simplified Scoring Models

Profile Models
 Profile models allow managers to plot risk/return

options for various alternatives and then select the
project that maximizes return while staying within a
certain range of minimum acceptable risk.

Profile Models
Show risk/return options for projects.
X7
X6
Maximum
Desired Risk
X2
Risk
X4 X5
X3
X1
Minimum Return
Desired Return

Profile Models
X7
X6 the efficient
Maximum
Desired Risk frontier is the set
of project
portfolio options
X2 that offers either a
maximum return
Risk
X4 X5 for every given

level of risk or the
minimum risk for
Efficient Frontier
every level of
X3 return
X1
Minimum Return
Desired Return
Profile Models
X7
Maximum
Desired Risk
X6
X3
Risk
X2
X4 X5
X1
Minimum Return
Desired Return
Financial Models
Based on the time value of money principal
 Payback period
 Net present value
All of these models use discounted cash flows

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 Higher NPV
Ft = net cash flow for period t values are better!
R = required rate of return
I = initial cash investment
Pt = inflation rate during period t

Net Present Value/ Example 1
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.

Solution
Compute the discount factor:
DF = 1/(1 + r + Pt)t
DF = 1/(1 + 0.08 + 0.03)t
DF (year zero) = 1/(1.11)0 = 1
DF (year 1) = 1/(1.11)1 = 0.9009
DF (year 2) = 1/(1.11)2 = 0.8116
DF (year 3) = 1/(1.11)3 = 0.7312
DF (year 4) = (1.11)4 = 0.6587
DF (year 5) = (1.11)5 = 0.5935
 Next, construct a table that demonstrates
projected inflows and outflows for the project.
The NPV
Year Net flow Discount NPV
column total
0 -$60,000 1.0000 -$60,000 is negative,
1 $15,000 0.9009 $13,513.51 so don’t
2 $15,000 0.8116 $12,174.34 invest!
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
Assume that your firm wants to choose between two
project options:
Project A offers the following opportunity: $500,000
invested today will yield an expected income stream of
$150,000 per year for 5 years.
Project B requires an initial investment of $400,000, but
its expected revenue stream is: Year 1 = 0, Year
2 = $50,000, Year 3 = $200,000, Year 4 = $300,000, and
Year 5 = $200,000.
Assume that a required rate of return for your company is
10% and that inflation is currently expected to remain
steady at 3% for the life of the project. Which is the better
investment? Why?
Solution
DF = 1/(1 + r + Pt)t
DF = 1/(1 + 0.01 + 0.03)t
DF (year zero) = 1/(1.13)0 = 1
DF (year 1) = 1/(1.13)1 = 0.88
DF (year 2) = 1/(1.13)2 = 0.78
DF (year 3) = 1/(1.13)3 = 0.69
DF (year 4) = (1.13)4 = 0.61
DF (year 5) = (1.13)5 = 0.54
Next, construct a table that demonstrates projected
inflows and outflows for the two projects:
Project A
Year Inflows Outflows Net flow Discount Factor NPV
0 500,000 (500,000) 1.000 (500,000)
1 150,000 150,000 0.88 132,000
2 150,000 150,000 0.78 117,000
3 150,000 150,000 0.69 103,500
4 150,000 150,000 0.61 91,500
5 150,000 150,000 0.54 81,000

Next, construct a table that demonstrates projected
inflows and outflows for the two projects:
Project B
Year Inflows Outflows Net flow Discount Factor NPV
0 400,000 (400,000) 1.000 (400,000)
1 0 0 0.88 0
2 50,000 50,000 0.78 39,000
3 200,000 200,000 0.69 138,000
4 300,000 300,000 0.61 183,000
5 200,000 200,000 0.54 108,000

Total $68,000
Conclusion: In this case, even though both projects

offer a positive NPV, the highest NPV is Project B.
Therefore, if we can only select one project to fund,
Project B offers higher returns.

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)

Payback Period/ Example 1
A company invested 250,000 and would receive

50,000 a year in annual savings. Compute payback
period
Payback = 250,000/5 = 5 years

A company wants to determine which of two

project alternatives is more attractive by using
payback period approach. The initial investments
of both projects is 500,000. They have determined
that each project will generate the cash flows
shown in the next slide.

Year Project A Project B

1 50,000 75,000
2 150,000 100,000
3 350,000 150,000
4 600,000 150,000
5 500,000 900,000

Payback = 2 years + 300,000/350,000 = 2.85 years

Project A should be selected 03-28

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Discounted Payback Period/ Example 3
A company wants to determine which of two

project alternatives is more attractive by using
payback period approach. The initial investments
of both projects is 200,000. The company’s
required rate of return is 15%. They have
determined that each project will generate the
cash flows shown in the next slide.

Year Project A Project B

1 120,000 20,000
2 120,000 60,000
3 160,000 140,000
4 100,000 240,000
5 60,000 200,000

Solution
DF = 1/(1 + r + Pt)t
DF = 1/(1 + 0.15)t
DF (year zero) = 1/(1.15)0 = 1
DF (year 1) = 1/(1.15)1 = 0.87
DF (year 2) = 1/(1.15)2 = 0.75
DF (year 3) = 1/(1.15)3 = 0.65
DF (year 4) = (1.15)4 = 0.57
DF (year 5) = (1.15)5 = 0.50
Project A
Year Net flow Discount Discounted Cumulative
Factor net flow cash flow
0 (200,000) 1 (200,000) (200,000)
1 120,000 0.87 104,400 (95,600)
2 120,000 0.75 90,000 (5,600)
3 160,000 0.65 104,000 98,400

4 100,000 0.57 57,000 155,800
5 60,000 0.50 30,000 185,800

Project B
Year Net flow Discount Discounted Cumulative
Factor net flow cash flow
0 (200,000) 1 (200,000) (200,000)
1 20,000 0.87 17,400 (182,600)
2 60,000 0.75 45,000 (137,600)
3 140,000 0.65 91,000 (46,600)

4 240,000 0.57 136,000 90,200
5 200,000 0.50 100,000 190,200
Project A should be selected

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, and
reprioritization of a firm’s projects.

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

Project Management
Chapter 2
The Organizational Context:

Strategy, Structure, and Culture

Projects and Organizational Strategy
Strategic management – the science of formulating,
implementing and evaluating cross-functional
decisions that enable an organization to achieve its
objectives.
Consists of:
 Developing vision and mission statements
 Formulating, implementing and evaluating
(environmental analysis, main objectives, strategies)
 Making cross functional decisions (to achieve
strategies)
 Achieving objectives (projects are the most effective
tools to allow objectives to be met)
02-02
Projects Reflect Strategy
Projects are stepping stones of corporate strategy
The firm’s strategic development is a driving force
behind project development
Some examples include:
A firm wishing to… …may have a project

redevelop products or processes to reengineer products or processes.
changes strategic direction or product to create new product lines.
portfolio configuration
improve cross-organizational to install an enterprise IT system.
communication & efficiency
02-03
Relationship of Strategic Elements
Mission
Objectives
Strategy Goals Programs
Figure 2.2 02-04

Each program is a collection of supporting projects
Projects are the building blocks that allow us to

implement strategic plans

FIGURE 2.3 Illustrating Mission
Alignment Between “… the business of
Strategic Elements and supplying system
Projects components to a world-
wide nonresidential
air conditioner market.”
Objectives
a. 14.5% ROI
b. Non-decreasing dividends
c. Socially-conscious image
Strategies Goals Programs

a. Existing products in existing Year 1: 8% ROI, $1 dividend, 1. Product Cost Improvement
markets with image maintain image, unit cost Program (PCIP)
maintenance down 5% 2. Image Assessment Program
b. Existing products in new Year 2: 9% ROI, $1 dividend, (IAP)
markets (foreign, restricted) improve image 3. Product Redesign Program
c. New products in existing Year 3: 12% ROI, $1 dividend, (PRP)
markets (significantly improve improve image 4. Product Development Program
image) Year 4: 14% ROI, $1.10 dividend (PDP)

02-07
Each program is a collection of supporting projects

For example, image assessment program may have
the following supporting projects:
 Customer survey project
 Quality assessment project
 Employee relations project

Stakeholder Management
Stakeholders are all individuals or groups who have an active
stake in the project and can potentially impact, either
positively or negatively, its development. Sets of project
stakeholders include:
Internal Stakeholders External Stakeholders

• Top management • Clients
• Accountant • Competitors
• Other functional • Suppliers
managers • Environmental,
• Project team members political, consumer,
and other intervener
groups
02-08
Project Stakeholder Relationships
Figure 2.4
02-09
Managing Stakeholders
1. Assess the environment
2. Identify the goals of the principal actors
3. Assess your own capabilities
4. Define the problem
5. Develop solutions
6. Test and refine the solutions
02-10
Project Stakeholder Management Cycle
1. Identify
Stakeholders
7. Implement
stakeholder 2. Gather information
management on stakeholders
strategy
6. Predict 3. Identify
stakeholder stakeholders’
behavior mission
4. Determine
5. Identify
stakeholder
stakeholder
strategy
strengths and Figure 2.5
weaknesses
02-11
Organizational Structure
Is a system used to group people and to define a hierarchy
within an organization.
Consists of three key elements:

1. Designates formal reporting relationships
 number of levels in the hierarchy
 span of control
2. Identifies groupings of:
 individuals into departments
 departments into the total organization
3. Design of systems for
 effective communication
 coordination
 integration across departments
02-12
Forms of Organization Structure
 Functional organizations – group people performing
similar activities into departments
 Project organizations – group people into project

teams on temporary assignments
 Matrix organizations – create a dual hierarchy in

which functions and projects have equal
prominence
02-13
Functional Organizational Structure
Figure 2.6 02-14

Functional Structures
Strengths Weaknesses
1. Firm’s design maintained 1. Functional siloing
2. Fosters development of 2. Lack of customer focus

in-depth knowledge
3. Standard career paths 3. Projects may take longer
4. Project team members 4. Projects may be sub-

remain connected with optimized
their functional group
02-15
Silo Effect Found in Functional
Structures
Figure 2.7 02-16

Project Organizational Structure
Figure 2.8
02-17
Project Structures
1. Project manager sole 1. Expensive to set up and
authority maintain teams
2. Improved communication 2. Chance of loyalty to the

project rather than the
3. Effective decision-making firm
4. Creation of project 3. No pool of specific

management experts knowledge
5. Rapid response 4. Workers unassigned at

project end
02-18
Matrix Organizational Structure
Figure 2.9
02-19
Matrix Structures
1. Suited to dynamic 1. Dual hierarchies mean
environments two bosses
2. Equal emphasis on 2. Negotiation required in
project management and order to share resources
functional efficiency 3. Workers caught between
3. Promotes coordination competing project &
across functional units functional demands
4. Maximizes scarce
resources
02-20
Organizational Culture
The unwritten rules of behavior, or norms that are used to
shape and guide behavior, is shared by some subset of
organization members and is taught to all new members
of the company.
 Unwritten
 Rules of behavior
 Held by some subset of the organization
 Taught to all new members
02-21
Key Factors That Affect Culture
Development
 Technology
 Environment
 Geographical location
 Reward systems
 Rules and procedures
 Key organizational members
 Critical incidents
02-22
Culture Affects Project Management
 Departmental interaction
 Employee commitment to goals
 Project planning
 Performance evaluation
02-23
Summary
 Understand how effective project management contributes
to achieving strategic objectives.
 Recognize three components of the corporate strategy
model: formulation, implementation, and evaluation.
 See the importance of identifying critical project
stakeholders and managing them within the context of
project development.
 Recognize the strengths and weaknesses of three basic
forms of organizational structure and their implications for
managing projects.
02-24
Summary
 Understand key concepts of corporate culture and how
cultures are formed.
 Recognize the positive effects of a supportive
organizational culture on project management practices
versus those of a culture that works against project
management.
02-25
Project Management
Chapter 1
Why Project Management?

Project Definition
 project is a unique venture with a beginning and an end,

conducted by people to meet established goals within
parameters of cost, schedule, and quality.
 Projects are goal-oriented, involve the coordinated undertaking

of interrelated activities, are of finite duration, and are all, to a
degree unique.
 Project is a complex, nonroutine, one time effort limited by

time, budget, resources, and performance specifications
designed to meet customer needs
Examples of projects
 Construction project
 Tunnel under the English Channel
 Introduce Windows 7
 Plan next Olympic games in London
“Projects, rather than repetitive tasks, are now the basis

for most value-added in business”
-Tom Peters
01-03
Project Definitions Summarized
A project can be considered any series of activities and

tasks that have:
 Specific objectives to be completed within certain
specifications,
 Defined start and end dates,
 Funding limits,
 Human and nonhuman resources, and
 Multifunctional focus.
01-04
Elements of Projects
(based on previous definitions)
 Complex, one-time processes (require the

participation of several members from different
departments).
 Limited by budget, schedule, and resources
(project constraints).
 Developed to resolve a clear goal or set of goals
 Customer-focused

General Project Characteristics
 Ad-hoc endeavors with a clear life cycle
 Projects are building blocks in the design and execution

of organizational strategies
 Projects are responsible for the newest and most improved

products, services, and organizational processes
 Projects provide a philosophy and strategy for the

management of change

General Project Characteristics
 Project management entail crossing functional and
organization boundaries
 Traditional management functions of planning,

organizing, motivating, directing, and controlling apply
 Principal outcomes are the satisfaction of customer

requirements within technical, cost, and schedule
objectives
 Projects are terminated upon successful completion of

performance objectives

Process vs. Project Work
Process Project
• Ongoing, day-to-day  Take place outside the
activities to produce normal, process-oriented
goods and services world
• Use existing systems,  Unique and separate from
properties, and routine, process-driven
capabilities work
• Typically repetitive  Continually evolving
A project is a temporary endeavor undertaken to create

a unique product or service.
PMBoK 2008
01-08
Differences between Process & Project
Management
Process Project
1. Repeat process or product 1. New process or product
2. Several objectives 2. One objective
3. Ongoing 3. One shot – limited life
4. People are homogeneous 4. More heterogeneous
5. Systems in place to integrate 5. Systems must be created to
efforts integrate efforts
6. Performance, cost, & time known 6. Performance, cost & time less
certain
7. Part of the line organization 7. Outside of line organization
8. Bastions of established practice 8. Violates established practice
9. Supports status quo 9. Upsets status quo
01-9
Project Success Rates
 Software & hardware projects fail at a 65% rate,
 Over half of all IT projects become runaways,
 Only 30% of technology-based projects and programs are a
success.
 Only 2.5% of global businesses achieve 100% project
success and over 50% of global business projects fail,
 Average success of business-critical application
development projects is 32%, and
 Approximately 42% of the 1,200 Iraq reconstruction
projects were eventually terminated due to
mismanagement or shoddy construction
01-10
Why are Projects Important?
1. Shortened product life cycles
2. Narrow product launch windows
3. Increasingly complex and technical products
4. Emergence of global markets
5. Economic period marked by low inflation
01-11
Project Life Cycles
Man Hours
Conceptualization Planning Execution Termination
Fig 1.3 Project Life Cycle Stages
01-12
Project Life Cycles
 Conceptualization - the development of the initial
goal and technical specifications.
 Planning – all detailed specifications, schedules,
schematics, and plans are developed
 Execution – the actual “work” of the project is
performed
 Termination – project is transferred to the customer,
resources reassigned, project is closed out.
01-13
Project Life Cycles and Their Effects
FIGURE 1.4 Project Life Cycles and Their Effects

01-14
Quadruple Constraint of Project Success
Figure 1-6 01-15

Four Dimensions of Project Success
FIGURE 1.7
01-16
Another approach to project assessment:
 Time: project should be completed on or before
established schedule
 Budget: was the project completed within budget
guideline?
 Performance: was the project completed within initially
determined technical specifications?
 Client acceptance: was the client satisfied with the
completed project?

Six Criteria for IT Project Success
 System quality
 Information quality
 Use
 User satisfaction
 Individual impact
 Organizational impact
01-18
Project Manager Responsibilities
1. Selecting a team
2. Developing project objectives and a plan for
execution
3. Performing risk management activities
4. Cost estimating and budgeting
5. Scheduling
6. Managing resources
01-19
Overview of the Project Management
Institute’s PMBoK Knowledge Areas
FIGURE 1.12 01-20

Summary
 Understand why project management is becoming such a
powerful and popular practice in business today.
 Recognize the basic properties of projects, including their
definition.
 Understand why effective project management is such a
challenge.
 Differentiate between project management practices and
more traditional, process-oriented business functions.
 Recognize the key motivators that are pushing companies
to adopt project management practices.
01-21
Summary
 Understand and explain the project life cycles, its
stages, and the activities that typically occur at each
stage in the project.
 Understand the concept of project “success,” including
various definitions of success, such as the “triple
constraint,” as well as alternative models of success.
01-22

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Project Management

Project Selection and Portfolio Management

Professor Ayman Abdallah

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 01-02

 Risk – unpredictability to the firm

All models only partially reflect reality and

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-03

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-04

 Requires agreement on criteria

Checklists are valuable for recording opinions and

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-07

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-07

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-07

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-08

 Profile models allow managers to plot risk/return

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-9

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-10

X4 X5 for every given

All of these models use discounted cash flows

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-13

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-14

Should you invest $60,000 in a project that will return $15,000

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-15

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-20

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-21

Conclusion: In this case, even though both projects

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-22

Cash flows should be discounted

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-23

A company invested 250,000 and would receive

Payback = 250,000/5 = 5 years

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-24

A company wants to determine which of two

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-25

Year Project A Project B

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-26

Payback = 2 years + 300,000/350,000 = 2.85 years

Payback = 4 years + 25,000/900,000 = 4.02 years

Project A should be selected 03-28

A company wants to determine which of two

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-29

Year Project A Project B

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-30

2 120,000 0.75 90,000 (5,600)

3 160,000 0.65 104,000 98,400

Payback = 2 years + 5,600/104,000 = 4.053 years

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-32

2 60,000 0.75 45,000 (137,600)

3 140,000 0.65 91,000 (46,600)

Payback = 3 years + 46,600/136,000 = 3.340 years

Project A should be selected

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-34

Low-cost environmental scanning

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-35

 Out of sync projects and portfolios

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 03-36

The Organizational Context:

Professor Ayman Abdallah

Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 01-02

A firm wishing to… …may have a project

Strategy Goals Programs

Figure 2.2 02-04

Each program is a collection of supporting projects