Nonnumeric Models of Project Selection

Characteristics of a Good Project Selection Model

• Should be simple and suitable for collecting and accumulating information in a computer database
• Should be able to maneuver data using commonly accessible, standard computer package programs

Numeric Models of Project Selection

• Payback Period: measures the time it takes to recover the project investment; a shorter payback period is better
• Internal Rate of Return (IRR): the discount rate that equates the present value of future cash flows of an investment with the initial investment
• Net Present Value: a numeric calculation that shows the present value of an investment based on expected income from that investment in future years minus the cost of the project
• Benefit-Cost Ratio: the ratio of the present value of cash inflows, at the required rate of return, to the initial cash outflow of the investment

Non-Numeric Models of Project Selection

• Sacred Cow: a project recommended by a senior and influential official in the organization
• Operating Necessity: a project that is obligatory to keep the system operating; does not necessitate a great extent of a formal evaluation
• Competitive Necessity: a project that is chosen to preserve the company's competitive position in that market
• Product Line Extension: a project to develop and distribute new products evaluated on the level to which it fits the firm's present product line
• Comparative Benefit Model: often used to select from a list of projects that are complex, difficult to assess, and often non-comparable

Model Requirements

Realism

• Should mirror the reality of the manager's decision situation together with the various objectives of both the firm and its managers
• Should take into consideration the realities of the firm's limitations on facilities, capital, human resources, technology, and so forth

Capability

• Should be complicated enough to deal with numerous time periods, simulate different situations both inside and external to the project, and optimize the decision
• Should formulate assessments through an optimizing model

Flexibility

• Should offer convincing outcomes among the conditions that the firm may experience
• Should have the ability to be effortlessly modified or to be self-adjusting in answer to changes in the firm's environment

Ease of Use

• Should be realistically convenient, not require a long time to carry out, and be simply to employ and comprehend
• Should not need out of the ordinary explanation

Cost

• Data gathering and modeling costs should be low in relation to the cost of the project and must certainly be less than the probable benefits of the project