3_danh Gia Lua Chon Du An
Transcript of 3_danh Gia Lua Chon Du An
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Lecture 2PROJECT EVALUATIONAND SELECTION
Le Thi Kim Oanh, Ph.D.Vice Rector
Danang University of Technology
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1. Criteria for project selection models
Project evaluation and selection is the process of evaluating individual projects orgroups of projects, and then choosing to implement some set of them so thatthe objectives of the parent organization will be achieved.
When a firm chooses a project selection model, the following criteria are most
important:
Realisim
Capability
Flexibility Ease of use
Cost
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2. Numeric Models2.1. Profitprofitability Models
2.2. Scoring Models
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2.1. Profit profitability Models
Payback Period
Average Rate of Return
Net Present Value (discounted cashflow)
Internal Rate of Return
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2.1. Profit profitability Models
Average Rate of Return
R = average annual profit/investmentcosts
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omments on the profit profitability models
Advantages:
1. The undiscounted models are simple to use andunderstand
2. All use readily available accounting data todetermine the cash flows
3. Model output is interns familiar to business decisionmaker
4. With a few exceptions, model output is on anabsolute profit profitability scale and allowsabsolute go/no-go decisions
5. Some profit models account for project risk
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omments on the profit profitability models
Disadvantages:1. These models ignore all nonmonetary factor except risk.2. Models that do not include discounting ignore the timing of cash
flows and the time value of money.3. Model that reduce cash flows to their present value are strongly
bias toward the short run.4. Payback-type models ignore cash flows beyond the payback
period.5. All are sensitive to errors in the input data for the early years.6.
All discounting models are nonlinear, and the effects of changes(or errors) in the variable or parameters are generally not obviousto most decision makers.
7. All these models depend for input on a determination of cashflows, but it is not clear exactly how the concept of cash flow isproperly defined for the purpose of evaluating projects.
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2.1. Scoring Models
In an attempt to overcome some of thedisadvantages of profitability models,
particularly their focus on a single criterion, anumber of evaluation and selection modelsthat use multiple criteria to evaluate a projecthave been developed.
Such models vary widely in their complexityand information requirements.
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2.1. Scoring Models
Unweighted 0-1 factor model
Unweighted Factor Scoring model
Weighted Factor Scoring model
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2.1.1. Unweighted 0 - 1 Factor Model
A set of relevant factors is selected List these factors in a preprinted form, and
one or more raters score the project on each
factor depending on whether or not itqualified for that individual criterion
The raters are chosen by seniormanagement, for most part from the rolls of
senior management The criteria for choice are understanding of
organizational goals and a good knowledge ofthe firms potential project porfolio.
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Example of the project rating sheet evaluation
form) for Unweighted 0 - 1 Factor Model
Project:
Rater: Date:
Factors Qualifies Does not qualify
No increase in energy requirement
Potential Market size, in dollars
Potential market share, percent
No new facility required
No new technical expertise required
No decrease in quality of final product
Ability to manage project with current personnel
No requirement for reorganization
Impact on workforce safety
Impact on environment standardsProfitability: Rate of return >15% after tax
Estimated annual profit more than $100,000
Time to break-even less than 3 years
Need for external consultants
Consistency with current lines of business
Impact on company image: With costumers
With our industry
X
X
X
X
X
X
X
XX
X
X
X
X
X
X
X
X
Totals 12 5
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2.1.1. Unweighted 0 - 1 Factor Model
Advantage of the model:
It uses several criteria in the decision process
Disadvantages:
It assumes all criteria are of equal importance
It allows no gradation of the degree to whicha specific project meets the various criteria
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2.1.2. Unweighted Factor Scoring model
Constructing a simple linear measure of the degreeto which the project being evaluated meets each ofthe listed criteria
Using a point scale (3,5,7 or ten-point scales arecommon)Example: 5 very good, 4 good, 3 fair, 2 poor, 1 very poor
The column of score is summed and the project witha total score exceeding some critical value are
selected (or the highest scoring project is selecteduntil the estimated costs of the selected projectequaled the resource limit
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Example of constructing scale for rating
For the criterion estimated annualprofit in dollars
For the criterion the quality of finalproduct
This scale is scoring cells that represent opinionrather than subjective fact, as was the case inthe profit scale
Score Performance Level
5
4
3
2
1
Above $1,100,000
$750,000 to $1,100,000
$500,000 to $750,000
$200,000 to $500,000
Less than $200,000
Score Performance Level
5
4
3
2
1
Significant and visibly improved
Significant improved but not visible
Not significantly changed
Significantly lowered but not visible
Significantly and visibly lowered
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2.1.3. Weighted Factor Scoring model
When numeric weights reflecting the relative importanceof each individual factor are added, we have a weightedfactor scoring model
In general, it takes the formSi = sijwj j = 1,2,3,.,n
whereSi= the total score of the ith projectSij= the score of the ith project on the jth criterion
Wj= the weight of the jth criterion When numeric weights have been generated, it is helpful
to scale the weights so that0 wj 1 j = 1,2,3, ,nw
j= 1
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omments on the scoring models
Advantages:
1. These modes allow multiple criteria to be
used for evaluation and decision. They caninclude profit-profitability models and bothtangible and intangible criteria
2. They are structurally simple and therefore
easy to understand and use3. They are a direct reflection of managerial
policy
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omments on the scoring models
Advantages:4. They are easily altered to accommodate
changes in the environment or managerial
policy5. Weighted scoring models allow for the fact
that some criteria are more important thanothers
6. These models allow easy sensitivityanalysis. The trade-offs between the criteriaare readily observable
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omments on the scoring models
Disadvantages:1. The output of a scoring model is strictly a relative
measure. Project scores do not represent the valueor utility associate with a project and thus do notindicate whether or not the project should besupported.
2. In general, scoring models are linear in form and theelements of such model assumed to be independent
3. The ease of use of these models is conducive to theinclusion of a large number criteria, most of whichhave such small weights that they have little impacton the total project score
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omments on the scoring models
Disadvantages:
4. Unweighted scoring models assume all
criteria are of equal importance, which isalmost certainly contrary to fact
5. To the extent that profit-profitability isincluded as an element in the scoring model,
this element has the advantages anddisadvantages noted earlier for profitabilitymodel themselves.
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1. Criteria for project selection models
Two critical important facts:1. Models do not make decisions, people do. The
manager, not the model, bears responsibility for
the decision. The manager may delegate the taskof making decision to a model , but theresponsibility cannot be abdicated
2. All models, however sophisticated, are only partialrepresentations of the reality they are meant toreflect. Reality is far too complex for us to capturemore than a small fraction of it in any model.Therefore no model can yield an optimal decisionexcept within its own, possibly inadequate,framework.
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3. The information base forevaluation and selection
Accounting Data
Measurements
Subjective versus objective
Quantitative versus qualitative
Reliable versus unreliable
Valid versus invalid
Technological Shock
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4. Project Proposals
The set of documents submitted forevaluation called the project proposal,
whether it is brief (a page or two) orextensive, and regardless of theformality with which it is presented
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4. Project Proposals
Several issues face firms preparingproposals, particularly firms in the
construction and consulting industries.- Which projects should be bid on?
- How much should be spent onpreparing proposals for bids?
- How should the bid prices be set?What is biding strategy
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4. Project Proposals
There are four distinct issues should be covered byany proposal:
1. The nature of the technical problem and how it is
to be approached2. The plan for implementing project once it has been
accepted
3. The plan for logistic support and administration
4. A description of the group to proposing to do thework, plus its past experience in similar work.
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Project team assignment
The project team is to develop a projectproposal, as described in the chapter. Pro
forma documents should be included, as wellas a justification of the project
The team should endeavor to apply as manyof the project selection-justification methods
as may be applicable. Both profitability andscoring models should certainly be included.