Project Selection

This blog examines different methods to examine the attractiveness of projects.

Figure 1: Project Selection

Non-Numeric Selection Methods

Figure 2: Dominic Cummings Leaving Downing Street before breaking the travelling restrictions he had helped roll out

Sacred Cow

This is when a senior person with authority wants to do a project, even though the project may not a good idea for the company. The project may continue until it fails or the company realises it is a bad idea. This can happen when senior people feel immune from criticism or protocol (Figure 2).

Operating Necessity

This project is done because there is no other choice and it is necessary. It may be on the back of another project folding and a company needing a new project for cashflow. The company will do the project unless it wishes to cease operations.

Figure 3: Disney Plus

Competitive Necessity

A project is undertaken out of a competitive necessity to keep a company competitive. It may involve restructuring and diversifying into different areas. An example is a TV station investing in online streaming to deal with the consumers watching more TV programmes on streaming services (Figure 3).

Numeric Methods of Project Selection

These methods look at questions such as the financial return or rewards of the project.

Figure 3: Mabs

Cost Benefit Analysis

This is deciding whether a project is attractive by comparing the profit and benefits from the project versus what else you could have done with that money or time. It is a process that estimates all the costs and revenue from a project, and also the strengths and weaknesses of the project. It can also be used to compare projects to see which one is more beneficial.

Before reorganising the Money Advice and Budget Service (MABS), the Citizens Information Bureau carried out a Cost Benefit Analysis of the project (Figure 3). The conclusion was that the benefits of this project outweighed the costs (KHSK Economic Consultants, 2017).

Financing Costs

This is assessing the cost it takes to finance the project. If you are borrowing funds from a bank, the interest rate is the financing cost. If the money is additional capital from shareholders, the cost is the dividend to be paid to them. If the money is already in the business, you should assess the alternative uses for the money.

Payback Method

The payback method looks at when the initial investment will be repaid. It may be paid back on completion, or after certain stages have been completed. This is a simple method, but perhaps not the most meaningful as it doesn’t look at the overall profits or benefits of the project.

Average Rate of Return

The average rate of return looks at the rate of return of the initial investment of the project, so the average proceeds over the life of the project are calculated and expressed as a percentage return per year of the project.

Figure 4: Inflation

Discounted Cash Flow Method

This method considers the effect time has on money. €50,000 now is worth more to a company than €50,000 in 10 years time. At a basic level, this is due to inflation. The longer the time period, the larger the effect will be.

The net present value is the value of your future profit today. It considers the net profit / loss per year, discounted to today’s value.

The internal rate of return is the future profit required to break even today. It is useful to compare projects which take place over long time periods. The higher the internal rate of return, the more attractive the project.

All future cash flows are estimated and discounted by using capital costs to get their present value. If the net present value is positive, the project is likely viable. Financing should be considered in the calculations.

Reference List:

KHSK Economic Consultants (2017) Cost Benefit Analysis of the Proposed Regional Reorganisation of the CIS and MABS. Available from:

https://www.citizensinformationboard.ie/downloads/cib/cost_benefit_analysis_sep2017.pdf . [Accessed 6 November 2021]