Project

Management
Session 4

INSTRUCTOR: DR. NITIN KOSHTA

QUANTITATIVE METHODS & OPERATIONS MANAGEMENT

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Project Initiation

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Project Classification
❑There are three basic kinds of projects

❑Compliance

❑Operational

❑Strategic

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Business Case
❑A project begins with a business case being presented to a funding entity by some senior
management group within the organisation.

❑A business case explains how the benefits of a project overweigh its costs and why it should be
executed.

❑A business case typically includes the strategic justification for the project, its monetary cost, the
expected benefits, any known or anticipated risks, the expected time of completion, and who will
be responsible for each of the phases of the project.

❑It includes non-monetary factors such as expected behavioural impacts, increase in efficiency,
service improvements, competitiveness effects, etc.

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Business Case
How to write a business case

❑Identify the business problem → should be aligned with business goals. To solve specific
business problems or create a business opportunity.

❑Identify the alternative solutions → identify different ways of solving the problem

❑Recommend a preferred solution → rank the solutions on the basis of different criteria

❑Describe the implementation approach

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Project Selection Models
❑Project selection is the process of evaluating proposed projects or groups of projects, and then
choosing to implement some set of them so that the strategic objectives of the organization will
be achieved.

❑The projects can be internal to the organization or external doing something for an external
client.

❑Numeric and non-numeric models

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Project Selection Models
❑Non-numeric Models

❑The Sacred Cow

❑The project is suggested by the senior officials of the organisation

❑Often the project is initiated with a single comment “if you have a chance, why don’t you look
into…”

❑The immediate result of this bland statement is the creation of a Project to investigate whatever
the boss has suggested.

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Project Selection Models
❑Non-numeric Models

❑The Operating Necessity

❑A project that is required in order to protect lives or property or to keep the company in operation

❑Is the system worth saving at the estimated cost of the project?

❑Efforts to keep the cost low

❑The project will be funded

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Project Selection Models
❑Non-numeric Models

❑The Competitive Necessity

❑A project that is required in order to maintain the company’s position in the marketplace

❑Examples?

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Project Selection Models
❑Non-numeric Models

❑Comparative Benefit Model

❑Projects are subjectively rank ordered based on their perceived benefit to the company.

❑For example, some projects concern potential new products, some concern changes in
production methods, and others propose to create a daycare center for employees with small
children.

❑Q-sort method

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Project Selection Models
❑Non-numeric Models

❑Comparative Benefit Model

❑Q-sort method

❑Project are divided into 3 groups (good, fair, & poor)

❑A group with more than 8 members is subdivided

❑Fair-plus and fair-minus.

❑Then the projects within each category are ordered

from best to worst

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Project Selection Models
❑Numeric Models

❑Payback period

❑The payback model measures the time it will take to recover the project investment.

❑Short paybacks are more desirable.

❑Some managers use payback model to eliminate unusually risky projects (with lengthy payback)

❑Limitation – it ignores the time value of money

❑Assumes cash flow for the investment period

❑Payback period = Estimated project cost/annual savings

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Project Selection Models
❑Numeric Models

❑Payback period

❑Project A has an initial investment of $700,000 and a project cash inflow of $225,000 for 5
years

❑Project B has an initial investment of $400,000 and a project cash inflow of $110,000 for 5
years.

❑Calculate payback period and returns on investment

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Project Selection Models
❑Numeric Models

❑Payback period

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Project Selection Models
❑Numeric Models

❑NPV (Net present value) or Discounted Cash Flow

❑This model uses management’s minimum desired rate of return (discount rate) to compute the
present value of all net cash inflows.

❑If the result is positive, it means the project meets the minimum desired rate of return and is
eligible for further consideration.

❑If the result is negative the project is rejected.

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Project Selection Models
❑Numeric Models

❑NPV (Net present value) or Discounted Cash Flow

❑Project A has an initial investment of $700,000 and a project cash inflow of $225,000 for 5
years

❑Project B has an initial investment of $400,000 and a project cash inflow of $110,000 for 5
years.

❑Let the discount rate be 15 percent

❑Compare the two projects using NPV

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Project Selection Models
❑Numeric Models

❑NPV (Net present value) or Discounted Cash Flow

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Project Selection Models
❑Numeric Models

❑NPV (Net present value) or Discounted Cash Flow

❑In the NPV model, the discount rate (return on investment (ROI) rate) can differ for different
projects.

❑Similarly ROIs differ for riskier vs safer projects.

❑Limitation – fails to include projects where financial return is impossible to measure or other
factors are vital to the accept or reject decision

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Project Selection Models
❑Numeric Models
❑Multi-weighted scoring models
❑This model uses several weighted selection criteria to evaluate project proposals.
❑It generally includes both quantitative and qualitative criteria.
❑Each selection criteria is assigned a weight.
❑Scores are assigned to each criterion for the project, based on its importance to the project
being evaluated.
❑The scores and weights are multiplied to get a total weighted score for the project.
❑The projects can then be compared. Higher weighted scores are considered better.

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Project Selection Models
❑Numeric Models

❑Multi-weighted scoring models

❑Criteria need to mirror the critical success factors of an organization.

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Project Selection Models
❑Numeric Models

❑Multi-weighted scoring models

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Applying a Selection Model
❑It is not necessary to have exactly the same criteria for the different types of projects.

❑However, experience shows that most organizations use similar criteria across all types of
projects, with perhaps one or two criteria specific to the type of project

❑Example, strategic breakthrough vs operational

❑Regardless of criteria differences among different types of projects, the most important criterion
is the project’s fit to the organization strategy

❑Hence, this criteria should be consistent across all types of projects and carry high priority.

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Applying a Selection Model
❑In the past, financial criteria were used almost to the exclusion of other criteria.

❑Last two decades have witnessed a dramatic shift to include multiple criteria in project selection.

❑Today, senior managers are interested in identifying the potential mix of projects that will yield
the best use of human and capital resources to maximize return on investment in the long run.

❑Some important factors for project selection – public image, ethical position, new technology,
protection of the environment, core competencies, and strategic fit.

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Applying a Selection Model
❑Sources and solicitation of project proposals

❑Project should come from anyone who believes her project will add value to the organization.

❑If you restrict proposals from specific groups or levels within the organization, then it could be an
opportunity lost.

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Applying a Selection Model

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Applying a Selection Model

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Applying a Selection Model
❑Ranking proposals and selection of projects

❑Culling through so many proposals to identify those that add the most value requires a
structured process

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Applying a Selection Model
❑Ranking proposals and selection of projects

❑A senior priority team evaluates each proposal in terms of feasibility, potential contribution to
strategic objectives, and fit within a portfolio of current projects.

❑Given the criteria and portfolio the team rejects or accepts the project.

❑If the project is approved, a project manager and staff are assigned to develop a detailed
implementation plan.

❑Once complete, the proposal with the implementation plan is reviewed a second time

❑Variance between what was estimated in the initial proposal and final estimates based on more
complete research/planning are examined.

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Applying a Selection Model
❑Ranking proposals and selection of projects

❑If there is a significant difference between the initial proposal and the final plan, then the senior
management may not approve the project.

❑Responsibility of prioritising

❑Senior management is responsible for prioritising projects.

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Question
❑A four-year financial project has net cash flows of $20,000; $25,000; $30,000; and $50,000 in
the next four years. It will cost $75,000 to implement the project. If the required rate of return is
0.2, conduct a discounted cash flow calculation to determine the NPV.

i = 20%
Investment Yr 1 Yr 2 Yr 3 Yr 4
Cashflow $ (75,000) $ 20,000 $ 25,000 $ 30,000 $ 50,000
PVIF 1.0000 1.2000 1.4400 1.7280 2.0736
PV $ $ (75,000) $ 16,667 $ 17,361 $ 17,361 $ 24,113
NPV $ 502

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Question
❑Nina is trying to decide in which of four shopping centers to locate her new boutique.

❑Class of clientele

❑Rent (90% as important as class of clientele)

Use a weighted score model to help
❑Indoor mall (95% as important as rent)
Nina come to a decision.
❑Traffic volume (80% as important as rent)
Location
1 2 3 4
Class of clientele Fair Good Poor Good
Rent Good Fair Poor Good
Indoor mall Good Poor Good Poor
Traffic volume Good Fair Good Poor

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Question

Mall Options
Grade Score
Category Weight 1 2 3 4 1 2 3 4
Class of clientele 1.000 2 3 1 3 2.000 3.000 1.000 3.000
Rent 0.900 3 2 1 3 2.700 1.800 0.900 2.700
Indoor mall 0.855 3 1 3 1 2.565 0.855 2.565 0.855
Traffic volume 0.720 3 2 3 1 2.160 1.440 2.160 0.720
Total Score 9.425 7.095 6.625 7.275

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