Ex1: Ch 2 Project Selection & Prioritization

Strategic objectives

Means of achieving the vision and mission Objective setting occurs annually Describe short- term and long-term results Describe measures of achievement

Strategic Analysis

The first part of the setting strategic direction is to analyze both the external and internal environments and determine how they will enhance or limit the organization's ability to perform SWOT Analysis (strengths, weaknesses, opportunities, and threats) -Strengths and weaknesses are the elements that project teams has control -Opportunities and threats are the elements that project teams has little or no control

Internal Rate of Return (IRR)

Think of a project as an investment and then select the highest return for your investment IRR is the rate at which an investment will yield returns. IRR is also known as return on investment. IRR normally is expressed as a percentage. The higher the IRR, the more profitable the project will be. Example If the IRR is 5%, it means that for every $100 that you invest, the return will be $105.

Program

"a group of related projects, subprograms, and program activities managed in a coordinated way to obtain benefits not available from managing them individually." PMBOK® Guide

Subproject

"a smaller portion of the overall project created when a project is subdivided into more manageable components or pieces." PMBOK® Guide

Portfolio management

"aligns with organizational strategies by selecting the right projects, prioritizing work, and providing needed resources." PMBOK® Guide

Portfolio

"projects, programs, sub-portfolios, and operations managed as a group to achieve strategic business objectives." PMBOK® Guide

Flow-down/enforcing objectives

-Once an organization's strategic objectives are identified, they must be enforced -Implement through ongoing operations -Projects are the primary method for implementing objectives

Present Value

-Present Value (PV) refers to the current worth of a future sum of money (the value today of future cash flows) -When you make an investment, it compounds yearly at the IRR (rate of return) of the duration of the investment. The initial investment is called present value. PV can be founded by this formula: PV : Present Value FV : Future Value r : interest rate n : Numbers of time period Formula Future value = present value x (1 + interest rate)time period

Cost Benefit Analysis Examples 1. Assume the cost of a project is $400,000 and the benefit is estimated at $800,000. What is the benefit-cost ratio? 2. A project has an estimated cost of $200,000 and estimated revenue of $700,000. What is the benefit-cost ratio?

1. Cost-benefit ratio = benefit ÷ cost Substitute the values, so you get: Cost-benefit ratio = 800,000 ÷ 400,000 Cost-benefit ratio = 2/1 2. Cost-benefit ratio = benefit ÷ cost Substitute the values, so you get: Cost-benefit ratio = 700,000 ÷ 200,000 Cost-benefit ratio = 7/2

Payback Period Example Example The cost of a project is $200K and the revenue of the project is estimated at $50K per year.

Answer The payback period will be 4 years.

IRR Example As a project manager, you need to decide between two projects. Project A has an IRR of 25%, and Project B has an IRR of 15%. All other criteria being equal, which project should you choose?

Answer When you need to choose between two projects given the internal rate of return, if all other criteria are equal, you always choose the project with the higher internal rate of return (IRR). So, you need to select project A.

Negotiate to Secure the Project

Cost of a project Contractual terms Schedule Personnel Quality standards Reporting mechanisms PM to find a solution to secure project work with enough profit potential

Vision

describes the organization of the future

Cost Benefit Analysis

For cost-benefit analysis, PM compares the cost and benefits of the project and express them as a ratio. If the ratio is more favorable to cost, then the cost of the project is higher than the benefit. If the ratio is more favorable to the benefit, then the benefit is higher than the cost of the project. Formula Cost-benefit ratio = benefit ÷ cost

Financial Models for Project Selection Net Present Value (NPV) Benefit-Cost Ratio (BCR) Internal rate of return (IRR) Payback Period (PP)

Net Present Value (NPV) Most widely accepted model Discount the expected future value Subtract discounted costs from discounted benefits Benefit-Cost Ratio (BCR) Divide the cash flow by the initial cash outlay A ratio above 1.0 means the project is expected to profit Internal rate of return (IRR) Percentage return expected on the investment A ratio above the current cost of capital Payback Period (PP) Time required to pay back the initial project investment Financial models ensure the cost and return perspective Financial models DO NOT ensure alignment with strategic goals

Economic models for selecting a project:

Payback Period Present Value Net present value Internal rate of return Other keys may use in project selection: Strategic goals of organization Market Need Technological Advancement Specific Sponsor

Present Value Example As a project manager, you want to invest money into a project and make a return on investment of $110,250 after 2 years at a 5% rate of return. What is the present value of the project?

Present value = future value ÷ (1 + internal rate of return)time period Substitute the values, so you get: Present value = 110,250 ÷ (1 + 0.05)2 Present value = $100,000

Strategic Planning Process

Strategic Analysis Guiding Principles (vision, mission statement) Strategic Objectives Flow-down/enforcing Objectives

Mission statement

mechanism for achieving the vision Culture, core values, belief Organization core purpose, primary business, primary customers