Financial selection example and Non-financial selection example
Instructor Question A) Financial selection is appropriate when there is a high level of confidence associated with estimates of future cash flows (Larson, 2014, pg. 37). The benefit of a financial selection is that it will bring the most cash flow to a company while a non-financial selection may not. Non-financial selection is to support projects that do not have high profit margins for other strategic reasons including: (1) To capture larger market share, (2) To make it difficult for competitors to enter the market, (3) To develop an enabler product, which by its introduction will increase sales in more profitable products, (4) To develop core technology that will be used in next-generation products, (5) To reduce dependency on unreliable suppliers, and (6) to prevent government intervention and regulation (Larson, 2014, pg. 39).
Financial selection example
Payback model – Payback model measure the time it will take to recover the project investment (Larson, 2014, pg. 37)
Net present value model – The net present value (NPV) model uses management’s minimum desire rate-of-return (discount rate, for example, 20 percent) to compute the present value of all net cash inflows (Larson, 2014, pg. 37). If result is positive (the project meets the minimum desired rate of return), it is eligible for further consideration (Larson, 2014, pg. 37).
Non-financial selection example
Checklist model – uses a list of questions to review potential projects and to determine their acceptance or rejections (Larson, 2014, pg. 39).
Multi-weighted scoring model – weighted scoring model will generally include qualitative and/or quantitative criteria and each selection criterion is assigned a weight, then scores are assigned to each criterion for the project, based on its importance to the project being evaluated, afterwards the weight and scores are multiplied to get a total weighted score for the project (Larson, 2014, pg. 40).
Instructor Question B)
a. Companies need a very good strategy in order to survive and profit in this competitive market. Project selection that does not align to the strategic plan will result in poor utilization of the organization’s resources – people, money, equipment, and core competencies (Larson, 2014, pg. 25). This is because the project will most likely not bring in profits that it intended. Time will be wasted, money spent on something not needed, and equipment not used to full potential. In the mean time if a competitor picks a project that is effective it will put that company in a major disadvantage.
b. There are three major problems in creating a project portfolio: (1) implementation gap, (2) organization politics, and (3) resource conflicts and multitasking (Larson, 2014, pg. 32).
Implementation gap refers to the lack of understanding and consensus of organization strategy among top and middle-level managers (Larson, 2014, pg. 33). This usually means that there is miscommunication or conflict to what project needs to be done first that causes many symptoms. Some symptoms of organizations struggling with strategy disconnect and unclear priorities are: (1) Conflicts frequently occur among functional managers and cause lack of trust, (2) frequently meetings are called to establish or renegotiate priorities, (3) people frequently shift from one project to another, depending on current priority, employees are confused about which projects are important, (4) people are working on multiple projects and feel inefficient, and (5) resources are not adequate (Larson, 2014, pg. 33).
Organization politics may cause project selection that is based not so much on facts and sound reasoning, but rather on the persuasiveness and power of people advocating projects (Larson, 2014, pg. 33). Many times a manager who has lots of power in an organization may force a decision on a certain project that is not needed. This can be either to gain or show power.
Resource conflicts and multitasking is the last problem. The problems of sharing resources and scheduling resources across projects grow exponentially as the number of projects rises (Larson, 2014, pg. 35). Sharing of resources causes some projects to have more priority then other. Multitasking involves starting and stopping work on one task to go and work on another project, and then returning to the work on the original task (Larson, 2014, pg. 35). Multitasking can be inefficient and can cause delays and extra costs.
Review Question 4: Different project serve different needs. The three major types of projects are compliance, operational, and strategic. Compliance projects are typically those needed to meet regulatory conditions required to operate in a region; hence, they are called “must do” projects (Larson, 2014, pg. 36). Operational projects are those that are needed to support current operations (Larson, 2014, pg. 36). Strategic projects are those that directly support the organization’s long-run mission (Larson, 2014, pg. 36). Depending on the type of need needed a certain project will be picked. It all depends on the type of strategy the firm chooses.
Exercise 6: I used the NPC formula to calculate the NPC for each project
NPV for Time Fades Away = -$25,090.02
NPV for On the Beach = $30,909.21
NPV for Tonight’s the Night = $110,538.84
The first priority for project arrow should be Tonight’s the Night because it has the highest NPV. Broken arrow can also fund On the Beach project because it also has a positive NPV. Those two projects have a financial benefit. Time Fades Away can also be funded if there is a non-financial reason. The order of priority based on return on investment is (1) Tonight’s the Night, (2) On the Beach, and (3) Time Fades Away.
Project 1: (9x2)+(5x5)+(2X4)+(0X3)+(2x1)+(5x3)= 68 Weighted Total
Project 2: (3x2)+(7x5)+(2X4)+(0X3)+(5x1)+(1x3)= 57 Weighted Total
Project 3: (6x2)+(8x5)+(2X4)+(3X3)+(6x1)+(8x3)= 99 Weighted Total
Project 4: (1x2)+(0x5)+(5X4)+(10X3)+(6x1)+(9x3)= 85 Weighted Total
Project 5: (3x2)+(10x5)+(10X4)+(1X3)+(8x1)+(0x3)= 107 Weighted Total
a. The project weight the highest is project 5, the lowest project 2.
Project 1: (9x5)+(5x5)+(2X4)+(0X3)+(2x1)+(5x3)= 95 Weighted Total
Project 2: (3x5)+(7x5)+(2X4)+(0X3)+(5x1)+(1x3)= 66 Weighted Total
Project 3: (6x5)+(8x5)+(2X4)+(3X3)+(6x1)+(8x3)= 117 Weighted Total
Project 4: (1x5)+(0x5)+(5X4)+(10X3)+(6x1)+(9x3)= 88 Weighted Total
Project 5: (3x5)+(10x5)+(10X4)+(1X3)+(8x1)+(0x3)= 116 Weighted Total
b. The project selection did change as shown above. The three highest weighted project scores are project 3, 5, and 1.
c. It is important in order to find the project that will make the biggest impact. If incorrect weight is used than the weight total will not be correct which will effect what project is picked in the end.
Larson, E., & Wilmot, G. (2014). Project management: The managerial process.
(6th ed.). New York: McGraw-Hill.