🏗️ Project Selection (PMP Exam Prep 2023)

Based on PMP Exam Prep 2023 by Rita Mulcahy

🏗️ Project Selection

A project manager needs to understand a project's history to manage it effectively and achieve its goals. Organizations typically have a formal process for selecting projects that align with business objectives, often involving a project selection committee.

When answering related exam questions, assume this formal process exists to prioritize projects based on resource investment and stakeholder interests.

📊 How Projects Are Selected

A project manager is usually not involved in the project selection process, but understanding it is essential for managing the business environment. Knowing why a project was selected and the value it brings is crucial.

Key Factors:

  • 🏢 Establishes a new area of business
  • 📜 Meets regulatory or compliance requirements
  • 💰 Selected as the most cost-effective or feasible solution

The reasons for selecting a project influence which constraints are flexible and affect project planning and management.

📈 Economic Measures for Project Selection

Economic measures help organizations evaluate and select projects by analyzing potential profitability, risk, and feasibility. These measures can also be applied in areas like quality, cost, risk management, and integrated change control.

💡 Return on Investment (ROI)

ROI calculates the potential profitability of an investment by comparing the benefits to the costs.

Formula:

\[ \text{ROI} = \frac{\text{Net Profit}}{\text{Cost of Investment}} \times 100 \]

Helps determine the potential return relative to the cost.

📅 Present Value (PV)

The value today of future cash flows, helping assess the worth of future income or costs.

Formula:

\[ \text{PV} = \frac{\text{FV}}{(1 + r)^n} \]

Where:

  • \( \text{FV} \) = Future Value
  • \( r \) = Interest Rate
  • \( n \) = Number of Time Periods

Example: To find the present value of $300,000 in 3 years at 10% interest:

\[ \text{PV} = \frac{300,000}{(1 + 0.1)^3} = \frac{300,000}{1.331} \approx 225,394 \]

So, the present value is approximately \$225,394.

🔮 Net Present Value (NPV)

NPV is the difference between the present value of benefits and the costs over time. A positive NPV suggests a good investment.

Example:

  • Project A: NPV = $45,000 (3 years)
  • Project B: NPV = $85,000 (6 years)

Project B is the better investment due to higher NPV.

💸 Internal Rate of Return (IRR)

IRR is the rate at which revenues equal costs. Higher IRR indicates a better investment.

Example:

  • Project A: IRR = 21%
  • Project B: IRR = 15%

Project A is preferable due to higher IRR.

⏳ Payback Period

The payback period is the time needed to recover the investment before the project starts generating profit. A shorter payback period is typically more attractive.

Example:

  • Project A: Payback period = 6 months
  • Project B: Payback period = 18 months

Project A is preferable due to its shorter payback period.

⚖️ Cost-Benefit Analysis (CBA)

CBA compares the expected costs of a project with its potential benefits, expressed as a benefit-cost ratio.

Benefit-Cost Ratio:

  • Greater than 1: Benefits outweigh the costs.
  • Less than 1: Costs outweigh the benefits.
  • Exactly 1: Costs and benefits are equal.

❓ Think About It (Benefit-Cost Ratio)

If a project has a benefit-cost ratio of 1.7, what does it mean?

🌟 Key Takeaways

Understanding the project selection process is essential for managing projects effectively. Knowing why a project was selected helps a project manager focus on achieving key objectives. Economic measures like ROI, PV, NPV, IRR, and CBA are used to assess and prioritize projects, guiding decisions on resource allocation and expected returns.