Project Selection and Portfolio Managementsilabus.feb.unila.ac.id/pm/bahan/pinto_pm3_ch03.pdf ·...
Transcript of Project Selection and Portfolio Managementsilabus.feb.unila.ac.id/pm/bahan/pinto_pm3_ch03.pdf ·...
3/11/2015
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Project Selection and Portfolio Management
03-01 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 3 Learning ObjectivesAfter completing this chapter, students will be able to:
Explain six criteria for a useful project-selection/screening model.
Understand how to employ checklists and simple scoring models to select projects.
Use more sophisticated scoring models, such as the Analytical Hierarchy Process.
Learn how to use financial concepts, such as the efficient frontier and risk/return models.
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Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Chapter 3 Learning ObjectivesAfter completing this chapter, students will be able to:
Employ financial analyses and options analysis to evaluate the potential for new project investments.
Recognize the challenges that arise in maintaining an optimal project portfolio for an organization.
Understand the three keys to successful project portfolio management.
03-03 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Project SelectionScreening models help managers pick winners from a pool of projects. Screening models are numeric or nonnumeric and should have:
Realism
Capability
Flexibility
Ease of use
Cost effectiveness
Comparability
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Screening & Selection Issues Risk – unpredictability to the firm
Commercial – market potential
Internal operating – changes in firm operations
Additional – image, patent, fit, etc.
All models only partially reflect reality and have both objective and subjective factors imbedded
03-05 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Approaches to Project Screening
Checklist model
Simplified scoring models
Analytic hierarchy process
Profile models
Financial models
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Checklist ModelA checklist is a list of criteria applied to possible projects.
Requires agreement on criteria
Assumes all criteria are equally important
Checklists are valuable for recording opinions and encouraging discussion
03-07 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Simplified Scoring ModelsEach project receives a score that is the weighted sum of its grade on a list of criteria. Scoring models require:
agreement on criteria
agreement on weights for criteria
a score assigned for each criteria
Relative scores can be misleading!
( )Score Weight Score
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Analytic Hierarchy ProcessThe AHP is a four step process:
1. Construct a hierarchy of criteria and subcriteria
2. Allocate weights to criteria
3. Assign numerical values to evaluation dimensions
4. Scores determined by summing the products of numeric evaluations and weights
Unlike the simple scoring model, these scores can be compared!
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FIGURE 3.1 Sample AHP with Rankings for Salient Selection Criteria 03-10Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Profile ModelsShow risk/return options for projects.
Criteria
selection as
axes
Rating each
project on
criteria
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Ris
k
Return
Maximum
Desired Risk
Minimum
Desired Return
X1
X4
X2
X3
X6
X5
Efficient Frontier
X7
Figure 3.4
Efficient Frontier
Figure 3.503-12Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
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Financial ModelsBased on the time value of money principal
Payback period
Net present value
Internal rate of return
Options models
All of these models use discounted cash flows
03-13 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Payback Period
Cash flows should be discounted
Lower numbers are better (faster payback)
InvestmentPayback Period
Annual Cash Savings
Determines how long it takes for a project to reach a breakeven point
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Payback Period ExampleA project requires an initial investment of $200,000 and will generate cash savings of $75,000 each year for the next five years. What is the payback period?
Year Cash Flow Cumulative
0 ($200,000) ($200,000)
1 $75,000 ($125,000)
2 $75,000 ($50,000)
3 $75,000 $25,000
Divide the
cumulative
amount by the
cash flow amount
in the third year
and subtract from
3 to find out the
moment the
project breaks
even.
25,0003 2.67
75,000years
03-15Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Net Present Value
Projects the change in the firm’s stock value if a project is undertaken.
(1 )
t
o t
t
t
t
FNPV I
r p
where
F = net cash flow for period t
R = required rate of return
I = initial cash investment
P = inflation rate during period t
Higher NPV
values are better!
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Net Present Value ExampleShould you invest $60,000 in a project that will return $15,000 per year for five years? You have a minimum return of 8% and expect inflation to hold steady at 3% over the next five years.
Year Net flow Discount NPV
0 -$60,000 1.0000 -$60,000.00
1 $15,000 0.9009 $13,513.51
2 $15,000 0.8116 $12,174.34
3 $15,000 0.7312 $10,967.87
4 $15,000 0.6587 $9,880.96
5 $15,000 0.5935 $8,901.77
-$4,561.54
The NPV
column total
is negative,
so don’t
invest!
03-17Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Internal Rate of ReturnA project must meet a minimum rate of returnbefore it is worthy of consideration.
1 (1 )
tt
n
t
ACFIO
IRR t
where
ACF = annual after tax cash flow for time period t
IO = initial cash outlay
n = project's expected life
IRR = the project's internal rate of return
Higher IRR values
are better!
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Internal Rate of Return ExampleA project that costs $40,000 will generate cash flows of $14,000 for the next four years. You have a rate of return requirement of 17%; does this project meet the threshold?
Year Net flow Discount NPV
0 -$40,000 1.0000 -$40,000.00
1 $14,000 0.9009 $12,173.91
2 $14,000 0.8116 $10,586.01
3 $14,000 0.7312 $9,205.23
4 $14,000 0.6587 $8,004.55
-$30.30
This table
has been
calculated
using a
discount
rate of
15%
The project doesn’t meet our 17% requirement
and should not be considered further.
03-19Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Options ModelsNPV and IRR methods don’t account for failure to
make a positive return on investment. Options models allow for this possibility.
Options models address:
1. Can the project be postponed?
2. Will future information help decide?
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Project Portfolio
03-21FIGURE 3.6 GE’s Tollgate Process
GE Tollgate Review Process Flow Map
03-22Copyright © 2013 Pearson Education, Inc. Publishing as Prentice HallFigure 3.7
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Project Portfolio ManagementThe systematic process of selecting, supporting, and managing the firm’s collection of projects.
Portfolio management requires:
decision making,
prioritization,
review,
realignment, and
reprioritization of a firm’s projects.
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Pharmaceuticals Development Process
03-24Figure 3.8Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
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Keys to Successful Project Portfolio Management
Flexible structure and freedom of communication
Low-cost environmental scanning
Time-paced transition
03-25 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Problems in Implementing Portfolio Management
Conservative technical communities
Out of sync projects and portfolios
Unpromising projects
Scarce resources
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Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Summary1. Explain six criteria for a useful project-selection
screening model.
2. Understand how to employ checklists and simple scoring models to select projects, including the recognition of their strengths and weaknesses.
3. Use more sophisticated scoring models, such as the Analytical Hierarchy Process.
4. Learn how to use financial concepts, such as the efficient frontier and risk/return models.
03-27 Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall
Summary5. Employ financial analyses and options analysis to
evaluate the potential for new project investments.
6. Recognize the challenges that arise in maintaining an optimal project portfolio for an organization.
7. Understand the three keys to successful project portfolio management.
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03-29Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall