Project Selection Methods

This article contains most of the important information you need to know about Project selection methods and economic concepts in order to answer questions related to this topic in the PMP Exam, I recommend you review this type of articles 1 week before your exam date, all information mentioned are based on PMBOK Guide 6th edition and PMP Exam Prep 9th edition for Rita Maclhy’s.

 

Economic Concepts:

  • Business Case: It captures the business need for a project, It explains why the project was selected, how it fits into the organization strategic goals and how it will bring business value to organization.
  • Economic Value added (EVA) : concerned with weather the project returns to the company more value than the initiative costs.
  • Opportunity Cost: the value of the project was not selected.
  • Sunk Costs: Expended costs, in accounting standards sunk costs should not be considered when deciding whether to continue with a troubled project.
  • Law of diminishing retursn: It states that after a certain point , adding more input will not produce a proportional increase in productivity.
  • Working Capital: Current assets minus current liabilities, the amount the organization can invest.
  • Depreciation: Large assets loses value over time in 2 forms :
  1. Straight line depreciation: the same amount of depreciation is taken each year.
  2. Accelerated depreciation : different amount of depreciation is taken each year and it depreciates faster than straight line in 2 forms also :
  3. Double declining balance.
  4. Sum of year digits.

 

Project Selection Methods

  • In professional organizations there should be a project selection committee in place to put all data together on various project ideas.
  • There is two categories of project selection methods :
  1. Benefit measurement method
  2. Murder Board
  3. Peer Review
  4. Scoring Models
  5. Economic models
  6. Constrained Optimization Methods
  7. Linear Programming
  8. Integer Programming
  9. Dynamic Programming
  10. Multi Objective Programming
  • Economic Models for project selection
  1. Present Value (PV)
  • It is the value today of future cash flow PV= FV/(1+r)n , where FV is future value , r is the interest rate , n is the number of years . higher is better for the project
  1. Net Present Value (NPV)
  • Present Value of the total benefits minus the costs over many time periods , higher is better
  1. Internal rate of return (IRR)
  • The rate at which the project inflows equal project outflows, project with higher IRR should be selected.
  1. Payback period, length of time it takes for the organization to recover its investment in the project before it starts accumulating profits, project with less payback period should be selected.
  2. Cost Benefit Analysis , compares the expected costs of the project to the potential benefits it could bring the organization , the project with higher benefit cost ratio should be selected.
  • In the PMP Exam , expect to see questions asking you to calculate the present value or the cost benefit analysis , but the majority of the questions will have a group of projects which you need to select one of them based on the five economical models explained above , for more detailed explanations and math questions of the project selection methods , you can refer here .


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