Project Selection and Portfolio Management (Which project should be supported?) (How can we manage...
-
Upload
jaylin-cordrey -
Category
Documents
-
view
214 -
download
0
Transcript of Project Selection and Portfolio Management (Which project should be supported?) (How can we manage...
![Page 1: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/1.jpg)
Project Selection and Portfolio Management
(Which project should be supported?)(How can we manage simultaneous projects?)
![Page 2: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/2.jpg)
Project Selection
Selection models (or guidelines) help managers pick winners from a pool of projects. Screening models are numeric or nonnumeric and should have:
Realism: reflect constraints and organizational goals
Capability: widely useable, robust
Flexibility: easy to modify
Ease of use: useable by many organizational members
Cost effectiveness
Comparability
![Page 3: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/3.jpg)
Numeric or not
• Numeric models: – Objective, external values– Subjective, internal values
• Nonnumeric models:– Rely on qualitative data
![Page 4: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/4.jpg)
Screening & Selection Issues(sub-issues in Table 3.1)
• Risk – unpredictability to the firm• Commercial – market potential, financial issues• 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.
![Page 5: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/5.jpg)
3-5Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
![Page 6: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/6.jpg)
3-6Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Approaches to Project Screening
• Checklist model
• Simplified scoring models
• Analytic hierarchy process
• Profile models
• Financial models
![Page 7: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/7.jpg)
Checklist Model
A checklist is a list of criteria applied to possible projects.
Requires agreement on criteriaAssumes all criteria are equally importantAssumes that there are only a few number of
criteria
Checklists are valuable for recording opinions and encouraging discussion.
![Page 8: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/8.jpg)
Example
![Page 9: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/9.jpg)
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 independent criteria
agreement on weights (relative importance) for criteria
a score assigned for each criteria
Relative scores can be misleading!
( )Score Weight Score
![Page 10: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/10.jpg)
3-10Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Analytic Hierarchy Process
The 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!
![Page 11: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/11.jpg)
3-11Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Profile Models
Show risk/return options for projects.
Maximum
Desired Risk
Minimum
Desired ReturnReturn
Risk
X1
X3
X5
X6
X4
X2
Efficient Frontier
Criteria selection as axes
Rating each project on criteria
![Page 12: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/12.jpg)
3-12Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Financial Models
Based on the time value of money principal
• Straight (Static) Payback period• Net present value• Internal rate of return• Options models
All of these models use discounted cash flows
![Page 13: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/13.jpg)
Straight Payback Period
Lower numbers are better (faster payback).
InvestmentPayback Period
Annual Cash Savings
Determines how long it takes for a project to reach a breakeven point.
![Page 14: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/14.jpg)
3-14Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Straight Payback Period Example
A 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
![Page 15: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/15.jpg)
Rate of Return
It is the reciprocal of the payback period formula:
1 / (payback period)
In the previous example:
1 / 2,67 = 37,45%
3-15Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
![Page 16: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/16.jpg)
3-16Copyright © 2010 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 )
to 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!
![Page 17: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/17.jpg)
3-17Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
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!
![Page 18: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/18.jpg)
3-18Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Internal Rate of Return
A project must meet a minimum rate of return before 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!
![Page 19: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/19.jpg)
3-19Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
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.
![Page 20: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/20.jpg)
3-20Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Options Models
NPV 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?
![Page 21: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/21.jpg)
Example
3-21Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
![Page 22: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/22.jpg)
3-22Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Project Portfolio Management
The systematic process of selecting, supporting, and managing the firm’s collection of projects.
Portfolio management requires:decision making,prioritization,review,realignment, andreprioritization of a firm’s projects.
![Page 23: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/23.jpg)
3-23Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Keys to Successful Project Portfolio Management
Flexible structure and freedom of communication
Low-cost environmental scanning
Time-paced transition
![Page 24: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/24.jpg)
3-24Copyright © 2010 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
![Page 25: Project Selection and Portfolio Management (Which project should be supported?) (How can we manage simultaneous projects?)](https://reader036.fdocuments.us/reader036/viewer/2022062515/56649c995503460f949563ac/html5/thumbnails/25.jpg)
THANKS FOR YOUR ATTENTION!
3-25Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall