Project Selection: Initiating Phase

• Most businesses have more projects that could be implemented than resources available.
• Project selection requires businesses to prioritise which projects to undertake.
• Project selection takes place at the beginning of the initiating phase.
• Businesses identify potential projects through strategic planning, normal business operations, responses to unexpected events and groups deciding to address specific needs.
• Project selection is driven by elements like security breaches, compliance regulations, and potential expense reductions.

General Guidelines

• Develop criteria for selection.
• List assumptions for each project.
• Gather data.
• Evaluate opportunities.
• Qualitative and quantitative project data should be used when deciding whether to proceed.
• Once a project is selected, a project charter is created to formally authorize it.
• Project charters provide sponsor approval, commit funding, summarise conditions/parameters, and establish a framework for a baseline plan.
• Project charters will be the basis for scope planning.

Project Charter Elements

• Project title and purpose.
• Project description and objectives.
• Criteria for success and expected benefits.
• Funding details.
• Major project deliverables.
• Key assumptions and constraints.
• The main risks.
• Approval requirements.
• Project manager and reporting requirements.
• Sponsor designee.
• Approval signature.
• Milestone schedule.

Critical Success Factors

• A clearly defined need before preparing a request for proposal (RFP).
• Decisions must be based on which opportunities provide the greatest overall benefit compared to their costs and potential consequences.
• A well-understood evaluation and selection process with a well-rounded committee is key.
• Establishment of quantitative project success criteria.
• RFPs allowing contractors to understand expectations is very important.
• Thorough proposals that address customer needs/requirements.
• An RFP also needs to include a statement of work, customer requirements and criteria to use when evaluating each proposal.
• RFPs should contain instructions for proposal format and content.
• Customers are advised to provide information to only some contractors, as this is an unfair competitive advantage.

Initiating Phase Summary

• The initiating phase of the project life cycle starts with the recognition of a need, problem or opportunity.
• Organizations must prioritise and select projects that will result in the greatest overall benefit.
• Project selection includes evaluating and deciding which projects should be implemented.
• Once a project is selected, a project charter is created to formally authorize it.
• If an organization lacks the expertise/staff capacity to complete a project it might be outsourced to a contractor, this means an RFP is prepared.
• After an RFP, the customer tells potential contractors that RFPs are available.

Learning Outcomes

• How projects are identified, prioritised and selected.
• The elements included in a project charter.

Project Selection Quantitative Methods

• ROI.
• NPV.
• IRR.
• WACC.
• Companies rarely have enough funds to do all of their desired projects.

Project Selection Tool Considerations

• Methods that attempt to quantify the benefits/cash flow are more objective.
• Quantitative project selection tools include methods like ROI, Present Value(PV), Net Present Value (NPV), Benefit cost Ratio (BCR) and payback period.
• Qualitative factors for project selection include considering Stakeholder bias, Organizational fit, and Risk analysis.

Return on Investment

• ROI measures financial returns over a pre-determined time.
• ROI analysis directly compares the magnitude of investment gains against the summation of all investment costs.
• The basic formula for ROI is the return or incremental gain divided by the cost.

Time Value of Money

• Money today is worth more than the promise or expectation that you will receive a dollar in the future.
• The concepts of TMV help you decide between offers.

Net Present Value

• NPV calculates the amount of money, in today's dollars, that a project is expected to make for a company.
• This calculation states how much money a business will make/lose as a result of a given project, in hard cash.
• Positive NPV means the company will make money.
• Negative NPV values mean money will be lost.
• NPV of 0 indicates enough money to cover total costs, representing the break even point.

Compounding and its Impact on Future Value

• The future value of an investment is calculated on not only the original amount, but also any interest earned.
• FV = Future Value.
• PV = Present Value.
• i = interest.
• n = number of years.

Present Value

• The value today of future cash flows.
• FV = the future value of money.
• PV = the present value of money.
• i = interest rate.
• n = number of time periods from today.

Internal Rate of Return (IRR)

• IRR is the rate where the net present value of cash outflow equals the net present value of cash inflow.
• IRR can be the rate at which an organization expects to recover an investment.
• It is a measure of the return on investment.
• It helps to determine whether the rate of return exceeds the interest rate a company is paying on the money it borrowed.
• If the IRR is greater than the rate of financing the project, then a surplus will remain after all of the finance costs are paid.

Weighted Average Cost of Capital (WACC)

• WACC is a calculation as a % of a firm's cost of capital, in which each category of capital is proportionately weighted.
• The WACC determines how much interest a company has to pay for every dollar it uses to finance.
• It is the borrowing rate that is applied to money used for projects and other business purchases.
• A financial Return must be greater than the money being borrowed to fund the project.