Multiple Project Selection Methods for Project Managers

When you have a number of interesting and challenging projects to choose from, finding a project that is
the right fit for your team’s skill set, level of competence, and has the best chance of success is the first
step in effective project management. Project Selection Methods offer a set of time-tested techniques
based on sound logical reasoning to choose a project and filter out undesirable projects with a very low
likelihood of success. And in this article, we will discuss the following project selection methods in detail:

1. Benefit measurement methods

2. Benefit/cost ratio
3. Economic model
4. Scoring model
5. Payback period
6. Net present value
7. Discounted cash flow
8. Internal rate of return
9. Opportunity cost
10. Constrained optimization methods
11. Non-financial considerations

What are Project Selection Methods?

Consider this scenario: the organization you are working for has been handed a number of project
contracts. Due to resource constraints, the organization can’t handle all the projects at once, so they
need to decide which project(s) will maximize profitability.

This is where project selection methods come into play. There are two categories of project selection
methods:

 Benefit Measurement Methods

 Constrained Optimization Methods

Although time-consuming, employing these methods is essential for an effective business plan. There
are a variety of documented methods for selecting a project, but the basic thumb rule is: for small
projects that aren’t very complex, the Benefit Measurement Model is useful, whereas if it’s a large,
complex project, the Constrained Optimization Method is a better fit. Let’s take a look at both these
methods in further detail.

Various Project Selection Methods

1. Benefit Measurement Methods

Benefit Measurement is a project selection technique based on the present value of estimated cash
outflow and inflow. Cost benefits are calculated and then compared to other projects to make a
decision. The techniques that are used in Benefit Measurement are as follows:
2. Benefit/Cost Ratio

Cost/Benefit Ratio, as the name suggests, is the ratio between the Present Value of Inflow or the cost
invested in a project to the Present Value of Outflow, which is the value of return from the project.
Projects that have a higher Benefit-Cost Ratio or lower Cost-Benefit Ratio are generally chosen over
others.

3. Economic Model

EVA, or Economic Value Added, is the performance metric that calculates the worth-creation of the
organization while defining the return on capital. It is also defined as the net profit after the deduction
of taxes and capital expenditure.

If there are several projects assigned to a project manager, the project that has the highest Economic
Value Added is picked. The EVA is always expressed in numerical terms and not as a percentage.

4. Scoring Model in Project Management

The scoring model in project management is an objective technique: the project selection committee
lists relevant criteria, weighs them according to their importance and their priorities, then adds the
weighted values. Once the scoring of these projects is completed, the project with the highest score is
chosen.

5. Payback Period

Payback Period is the ratio of the total cash to the average per period cash. It is the time necessary to
recover the cost invested in the project. The Payback Period is a basic project selection method. As the
name suggests, the payback period takes into consideration the payback period of an investment. It is
the time frame that is required for the return on an investment to repay the original cost that was
invested. The calculation for payback is fairly simple:

When the Payback period is used as the Project Selection Method, the project that has the shortest
Payback period is preferred since the organization can regain the original investment faster. There are,
however, a few limitations to this method:

 It does not consider the time value of money.

 Benefits accrued after the payback period is not considered; it focuses more on the liquidity
while profitability is neglected.
 Risks involved in individual projects are neglected.

6. Net Present Value

Net Present Value is the difference between the project’s current value of cash inflow and the current
value of cash outflow. The NPV must always be positive. When picking a project, one with a higher NPV
is preferred. The advantage of considering the NPV over the Payback Period is that it takes into
consideration the future value of money. However, there are limitations of the NPV, too:
  There isn’t any generally accepted method of deriving the discount value used for the present
value calculation.
 The NPV does not provide any picture of profit or loss that the organization can make by
embarking on a certain project.
 For more details on the NPV and how to use the NPV as a tool to filter projects out, here’s an
insightful article on calculating the opportunity costs for projects.

7. Discounted Cash Flow

It’s well-known that the future value of money will not be the same as it is today. For example, $20,000
won’t have the same worth ten years from now. Therefore, during calculations of cost investment and
ROI, be sure to consider the concept of discounted cash flow.

8. Internal Rate of Return

The Internal Rate of Return is the interest rate at which the Net Present Value is zero—attained when
the present value of outflow is equal to the present value of inflow. Internal Rate of Return is defined as
the “annualized effective compounded return rate” or the “discount rate that makes the net present
value of all cash flows (both positive and negative) from a particular investment equal to zero.” The IRR
is used to select the project with the best profitability; when picking a project, the one with the higher
IRR is chosen.

When using the IRR as the project selection criteria, organizations should remember not to use this
exclusively to judge the worth of a project; a project with a lower IRR might have a higher NPV and,
assuming there is no capital constraint, the project with the higher NPV should be chosen as this
increase the shareholders’ profits.

9. Opportunity Cost

Opportunity Cost is the cost that is given up when selecting another project. During project selection,
the project that has the lower opportunity cost is chosen.

10. Constrained Optimization Methods

Constrained Optimization Methods, also known as the Mathematical Model of Project Selection, are
used for larger projects that require complex and comprehensive mathematical calculations. The
techniques that are used in Constrained Optimization Methods are as follows:

These topics, however, are not discussed in detail in the PMP® certification. For the exam, all that is
necessary to know is that this is the list of Mathematical Model techniques that are used in Project
Selection.

11. Non-Financial Considerations

There are non-financial gains that an organization must consider; these factors are related to the overall
organizational goals. The organizational strategy is a major factor in project selection methods that will
affect the organization’s choice in the choice of project. Customer service relationships are chief among
these organizational goals. An important necessity in today’s business world is to build effective, cordial
customer relationships.

Other organizational factors may include political issues, change of management, speculative purposes,
shareholders’ requests, etc.

Conclusion

As you now know, Project Selection may be carried out in a number of ways. It is best for an
organization to try different project selection methods and consider a wide range of factors before
choosing a project to be as certain as possible that the best decision is made for the company.