Project Management:

A Managerial Approach 4/e

By Jack R. Meredith and Samuel J. Mantel, Jr.
Published by John Wiley & Sons, Inc.
Presentation prepared by RTBM WebGroup

Project Management
A Managerial Approach

Chapter 2
Project Selection

Project Selection
Project selection is the process of evaluating
individual projects or groups of projects, and
then choosing to implement some set of
them so that the objectives of the parent
organization will be achieved
Managers often use decision-aiding models to
extract the relevant issues of a problem from
the details in which the problem is embedded
Models represent the problems structure and
can be useful in selecting and evaluating
projects
Chapter 2-1

Criteria for Project

Selection Models
Realism - reality of managers decision
Capability- able to simulate different scenarios and
optimize the decision
Flexibility - provide valid results within the range of
conditions
Ease of Use - reasonably convenient, easy execution, and
easily understood
Cost - Data gathering and modeling costs should be low
relative to the cost of the project
Easy Computerization - must be easy and convenient to
gather, store and manipulate data in the model
Chapter 2-2

Nature of Project Selection

Models
2 Basic Types of Models
Numeric
Nonnumeric

Two Critical Facts:

Models do not make decisions - People do!
All models, however sophisticated, are only
partial representations of the reality the are
meant to reflect

Chapter 2-3

Nonnumeric Models
Sacred Cow - project is suggested by a senior and
powerful official in the organization

Operating Necessity - the project is required to

keep the system running

Competitive Necessity - project is necessary to

sustain a competitive position

Product Line Extension - projects are judged on

how they fit with current product line, fill a gap, strengthen
a weak link, or extend the line in a new desirable way.

Comparative Benefit Model - several projects are

considered and the one with the most benefit to the firm is
selected
Chapter 2-4

Numeric Models:
Profit/Profitability

Payback period - initial fixed

investment/estimated annual
project

cash inflows from the

Average Rate of Return - average annual

profit/average investment

Discounted Cash Flow - Present Value Method

Internal Rate of Return - Finds rate of return
that equates present value of inflows and outflows

Profitability Index - NPV of all future expected

cash flows/initial cash investment
Chapter 2-5

Numeric Models: Scoring

Unweighted 0-1 Factor Model
Unweighted Factor Scoring Model
Weighted Factor Scoring Model
Constrained Weighted Factor Scoring Model
Goal Programming with Multiple Objectives

Chapter 2-6

Risk Versus Uncertainty

Analysis Under Uncertainty - The Management
of Risk
The difference between risk and uncertainty
Risk - when the decision maker knows the
probability of each and every state of nature and
thus each and every outcome. An expected value
of each alternative action can be determined
Uncertainty - when a decision maker has
information that is not complete and therefore
cannot determine the expected value of each
alternative
Chapter 2-7

Risk Analysis
Principal contribution of risk analysis is
to focus the attention on understanding
the nature and extent of the uncertainty
associated with some variables used in
a decision making process
Usually understood to use financial
measures in determining the desirability
of an investment project
Chapter 2-8

Risk Analysis
Probability distributions are determined or
subjectively estimated for each of the
uncertain variables
The probability distribution for the rate of
return (or net present value) is then found
by simulation
Both the expectation and its variability are
important criteria in the evaluation of a
project
Chapter 2-9

Risk Analysis

Chapter 2-10

Information Base for

Selections
Accounting Data
Measurements

Subjective vs. Objective

Quantitative vs. Qualitative
Reliable vs. Unreliable
Valid vs. Invalid

Technological Shock
Chapter 2-11

Project Proposals
Which projects should be bid on?
How should the proposal-preparation
process be organized and staffed?
How much should be spent on
preparing proposals for bids?
How should the bid prices be set?
What is the bidding strategy? Is it
ethical?
Chapter 2-12

Project Proposal
Contents

Executive Summary
Cover Letter
Nature of the technical problem
Plan for Implementation of Project
Plan for Logistic Support & Administration of the
project
Description of group proposing to do the work
Any relevant past experience that can be applied

Chapter 2-13

Summary
Primary selection criteria are realism,
capability,flexibility, ease of use, and cost
In preparing to use a model, a firm must
identify its objectives, weighting them
relative to each other, and determining
the probable impacts of the project on
the firms competitive abilities.
Models can be numeric or nonnumeric
Chapter 2-14

Summary
Numeric Models can be subdivided into
profitability and scoring models
To handle uncertainty, pro forma
documents, risk analysis, and simulation
with sensitivity analysis are helpful
Special care should be given to data in
project selection models. Of concern are
data taken from accounting data base and
the effect of technological shock
Chapter 2-15

Summary
Project proposals generally consist of
several sections: the technical approach,
the implementation plan, the plan for
logistics support and administration, and
past experience.
The history of project selection models has
shown an increase in the use of formal
models, particularly profitability models.

Chapter 2-16

Project Selection

Questions?

Chapter 2-17

Project Selection

Picture Files

Project Selection

Figure 2-1

Project Selection

Figure 2-2

Project Selection

Table Files

Project Selection

Project Selection

Project Selection

Project Selection

Project Selection

Project Selection

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