5.1: Choosing a Project

Matching: Choosing a Project

K – Projects that allow us to create something new and innovative

B – Projects that improve our current operations

J – Projects that must be done in order to comply with an industry or governmental regulation or standard

C – Direct costs, such as materials, labor, and equipment; Indirect costs, such as insurance and Project manager labor; Contingency funds and budgetary reserves

H – The loss of potential gain from other alternatives when one alternative is chosen

E – The estimated resale value of an asset at the end of its useful life

D – A cost that has already been incurred and cannot be recovered

F – A financial estimate of the project and operating costs over the lifetime of a product

G – A project considered (perhaps unreasonably) immune from question or criticism

I – A group of experts review a project proposal by pointing out its flaws and weaknesses

A – Mathematically intensive means of analyzing a series of projects and are not easily generalized

5.3: Economic Scoring Models

Economic Model Comparison Tables

Payback

Formula for Calculating
How is result of formula expressed?	In years or months
Advantages	Easy to understand and communicate Easy to calculate Can be used to quickly evaluate projects that are very similar in scope
Disadvantages	Does NOT account for the time value of money Does NOT reflect the size of the investment in the project
Notes	Probably a good way to do an initial assessment of a project; deeper analysis can be done later if the project seems viable

Net Present Value

Formula for Calculating
How is result of formula expressed?	Dollars The higher the number, the better the project in terms of NPV Projects with a negative NPV are probably rejected
Advantages	Accounts for the time value of money Shows the relative amount of dollars that will be earned or lost over the life of the project.
Disadvantages	Slightly harder to calculate
Notes	Modern spreadsheets make it easy to calculate NPV and even have built-in functions for NPV

Internal Rate of Return

Formula for Calculating	Can vary by organization, but can use the following for a basic calculation:
How is result of formula expressed?	Percentage that represents the return that we can expect on our capital investment in the project. Higher numbers are better
Advantages	Accounts for the time value of money Can take into account a number of internal factors about the organization and project
Disadvantages	Harder to calculate Does NOT reflect the size of the investment in the project
Notes	Modern Spreadsheets and financial calculators will have a function to help with basic IRR calculations

Benefit to Cost Ratio

Formula for Calculating
How is result of formula expressed?	Ratio Ratio greater than 1 is good Ratio less than 1 is bad
Advantages?	Easy way to compare projects
Disadvantages?	Does NOT reflect the size of the investment in the project
Notes

Questions: Economic Scoring Models

1. 8 years, seven months

2. Project D

3. Not enough data to answer

4. Project D with a BCR of 1.99

5. Discount Rate, Capital Costs, Annual Cash inflows

6. Project D with an IRR of 8%

7. As percentage representing a Rate of Return

8. As an amount of dollars that the project will generate in terms of present day value

9. As the number of years until the project makes as much as it costs

10. As a ratio of Benefits to Costs

11. Project Vitamin E (NPV calculations are as follows:)