Applying Project Selection Methods

Now that we've discussed some of the project selection techniques, let's look at how to apply them when choosing projects or project alternatives. You can use one, two, or several of the benefit measurement methods alone or in combination to come up with a selection decision. Remember that payback period is the least precise of all the cash flow techniques, NPV is the most conservative cash flow technique, and NPV and IRR will generally bring you to the same accept/reject conclusion.

You can use project selection methods, and particularly the benefit measurement methods, to evaluate multiple projects or a single project. You might be weighing one project against another or simply considering whether the project you're proposing is worth performing.

Real World Scenario fun Days vacation resorts

Jerry is a project manager for Fun Days Vacation Resorts. He is working on three different project proposals to present to the executive steering committee for review. As part of the information-gathering process, Jerry visits the various resorts pretending to be a guest. This gives him a feel for what Fun Days guests experience on their vacations, and it better prepares him to present project particulars and alternatives.

Jerry has prepared the project overviews for three projects and called upon the experts in marketing to help him out with the projected revenue figures. He works up the numbers and finds the following:

■ Project A: payback period = 5 years; IRR = 8 percent

■ Project B: payback period = 3.5 years; IRR = 3 percent

■ Project C: payback period = 2 years; IRR = 3 percent

Funding exists for only one of the projects. Jerry recommends Project A and predicts this is the project the steering committee will choose since the projects are mutually exclusive.

Jerry's turn to present comes up at the steering committee. Let's listen in on the action:

"And, on top of all the benefits I've just described, Project A provides an IRR of 8 percent, a full 5 percent higher than the other two projects we discussed. I recommend the committee choose Project A."

"Thank you Jerry," Colleen says. "Good presentation." Colleen is the executive chairperson of the steering committee and has the authority to break ties or make final decisions when the committee can't seem to agree.

"However, here at Fun Days we like to have our fun sooner rather than later." Chuckles ensue from the steering committee. They've all heard this before. "I do agree that an 8 percent IRR is a terrific return, but the payback is just too far out into the future. There are too many risks and unknowns for us to take on a project with a payback period this long. As you know, our industry is directly impacted by the health of the economy. Anything can happen in five years' time. I think we're much better off going with Project C. I recommend we accept Project C. Committee members, do you have anything to add?"

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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