Copyright 2013 Pearson Education, Inc. Publishing as Prentice
Hall Day 6 Slide 2 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Copyright 2005 Prentice HallCh 1 -2
Agenda Questions? Assignment 2 Due Assignment 3 Posted Read Case
Study 3.1, Keflavik Paper Company one page 103, and Case Study 3.2,
Project Selection at Nova Western on page 104, Inc Due September 30
prior to class IP part 1 due September 26 (Next Class). Project
Selection and Portfolio Management IP Group Work Slide 3 Copyright
2013 Pearson Education, Inc. Publishing as Prentice Hall Project
Selection and Portfolio Management 03-03 Slide 4 Copyright 2013
Pearson Education, Inc. Publishing as Prentice Hall Chapter 3
Learning Objectives After completing this chapter, students will be
able to: Explain six criteria for a useful project-
selection/screening model. Understand how to employ checklists and
simple scoring models to select projects. Use more sophisticated
scoring models, such as the Analytical Hierarchy Process. Learn how
to use financial concepts, such as the efficient frontier and
risk/return models. 03-04 Slide 5 Copyright 2013 Pearson Education,
Inc. Publishing as Prentice Hall Chapter 3 Learning Objectives
After completing this chapter, students will be able to: Employ
financial analyses and options analysis to evaluate the potential
for new project investments. Recognize the challenges that arise in
maintaining an optimal project portfolio for an organization.
Understand the three keys to successful project portfolio
management. 03-05 Slide 6 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Approaches to Project Screening 1.
Checklist model 2. Simplified scoring models 3. Analytic hierarchy
process (easier than it sounds) 4. Profile models 5. Financial
models 03-06 Slide 7 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Checklist Model A checklist is a list
of criteria applied to possible projects. Requires agreement on
criteria Assumes all criteria are equally important Checklists are
valuable for recording opinions and encouraging discussion 03-07
Slide 8 3-8 Table 3.2 SIMPLIFIED CHECKLIST MODEL FOR PROJECT
SELECTION Performance on Criteria HighMediumLow ProjectCriteria
Project AlphaCost X Profit PotentialX Time to MarketX Development
RisksX Project BetaCostX Profit PotentialX Time to Market X
Development RisksX Project GammaCost X Profit Potential X Time to
MarketX Development Risks X Project DeltaCostX Profit PotentialX
Time to Market X Development RisksX Slide 9 Copyright 2013 Pearson
Education, Inc. Publishing as Prentice Hall Simplified Scoring
Models Each project receives a score that is the weighted sum of
its grade on a list of criteria. Scoring models require: agreement
on criteria agreement on weights for criteria a score assigned for
each criteria Relative scores can be misleading! 03-09 Slide 10
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
3-10 Simple Scoring simple scoring.xlsx Slide 11 Copyright 2013
Pearson Education, Inc. Publishing as Prentice Hall Analytic
Hierarchy Process The AHP is a four step process: 1. Construct a
hierarchy of criteria and sub-criteria 2. Allocate weights to
criteria 1. Criteria weights = 1 2. sub-criteria weights = criteria
weight 3. Assign numerical values to evaluation dimensions 4.
Scores determined by summing the products of numeric evaluations
and weights Unlike the simple scoring model, these scores can be
compared! 03-011 Slide 12 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall 3-12 Step 1& 2 Slide 13 Copyright
2013 Pearson Education, Inc. Publishing as Prentice Hall 3-13 Step
3 & 4 Slide 14 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Profile Models Show risk/return options
for projects. Criteria selection as axes Rating each project on
criteria 03-14 Risk Return Maximum Desired Risk Minimum Desired
Return X1X1 X4X4 X2X2 X3X3 X6X6 X5X5 Efficient Frontier X7X7 Figure
3.4 More Desirable Slide 15 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Efficient Frontier Figure 3.5 03-15
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
X5X5 X 6 Slide 16 Copyright 2013 Pearson Education, Inc. Publishing
as Prentice Hall Financial Models Based on the time value of money
principal Payback period Net present value Internal rate of return
Options models DCF Example.xlsx All of these models use discounted
cash flows 03-16 Slide 17 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Payback Period Cash flows should be
discounted Lower numbers are better (faster payback) Determines how
long it takes for a project to reach a breakeven point 03-17 Slide
18 Payback Period Example A project requires an initial investment
of $200,000 and will generate cash savings of $75,000 each year for
the next five years. What is the payback period? YearCash
FlowCumulative 0($200,000) 1$75,000($125,000) 2$75,000($50,000)
3$75,000$25,000 Divide the cumulative amount by the cash flow
amount in the third year and subtract from 3 to find out the moment
the project breaks even. 03-18 Copyright 2013 Pearson Education,
Inc. Publishing as Prentice Hall Slide 19 Net Present Value
Projects the change in the firms stock value if a project is
undertaken. Higher NPV values are better! 03-19 Slide 20 Net
Present Value Example Should you invest $60,000 in a project that
will return $15,000 per year for five years? You have a minimum
return of 8% and expect inflation to hold steady at 3% over the
next five years. YearNet flowDiscountNPV 0-$60,0001.0000-$60,000.00
1$15,0000.9009$13,513.51 2$15,0000.8116$12,174.34
3$15,0000.7312$10,967.87 4$15,0000.6587$9,880.96
5$15,0000.5935$8,901.77 -$4,561.54 The NPV column total is
negative, so dont invest! 03-20 Copyright 2013 Pearson Education,
Inc. Publishing as Prentice Hall npv.xls Slide 21 Copyright 2013
Pearson Education, Inc. Publishing as Prentice Hall Internal Rate
of Return A project must meet a minimum rate of return before it is
worthy of consideration. Higher IRR values are better! 03-21
http://www.mathsisfun.com/money/internal-rate-return.html Slide 22
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
IRR Calculations IRR calculations is the dame process as NPV except
Vary the discount rate such that NPV = 0 IF NPV is negative
Discount rate is too high If NPV is positive Discount rate is too
low Keep varying untill NPV is close enough to Zero Quick Check
method Do NPV with target rate If NPV is negative NO GO If NPV is
postive Go 22 Slide 23 Internal Rate of Return Example A project
that costs $40,000 will generate cash flows of $14,000 for the next
four years. You have a rate of return requirement of 17%; does this
project meet the threshold? YearNet flowDiscountNPV
0-$40,0001.0000-$40,000.00 1$14,0000.8696$12,173.91
2$14,0000.75614$10,586.01 3$14,0000.6575$9,205.23
4$14,0000.5717$8,004.55 -$30.30 This table has been calculated
using a discount rate of 15% The project doesnt meet our 17%
requirement and should not be considered further. 03-23 Copyright
2013 Pearson Education, Inc. Publishing as Prentice Hall irr.xlsx
Slide 24 Copyright 2013 Pearson Education, Inc. Publishing as
Prentice Hall Options Models NPV and IRR methods dont account for
failure to make a positive return on investment. Options models
allow for this possibility. Options models address: 1. Can the
project be postponed? 2. Will future information help decide? 03-24
Slide 25 Copyright 2013 Pearson Education, Inc. Publishing as
Prentice Hall 3-25 Option Example Premise $300,000 investment with
12% ERR and 10 year life Step one Calculate NPV using known spread
of risk 50% chance of $100,000 50% chance of $10,000
0.5*$100,000+0.5*$10,000 = $55,0000/year Step two Wait for more
info to improve spread of risk 70% chance of $100,000 30% chance of
$10,000 0.7*$100,000+0.3*$10,000 = $73,0000/year Slide 26 Copyright
2013 Pearson Education, Inc. Publishing as Prentice Hall 3-26
Option example Options.xlsx Slide 27 Copyright 2013 Pearson
Education, Inc. Publishing as Prentice Hall Project Portfolio 03-27
FIGURE 3.6 GEs Tollgate Process Slide 28 Copyright 2013 Pearson
Education, Inc. Publishing as Prentice Hall GE Tollgate Review
Process Flow Map 03-28 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Figure 3.7 Slide 29 Copyright 2013
Pearson Education, Inc. Publishing as Prentice Hall Project
Portfolio Management The systematic process of selecting,
supporting, and managing the firms collection of projects.
Portfolio management requires: decision making, prioritization,
review, realignment, and reprioritization of a firms projects.
03-29 Slide 30 30 Slide 31 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Pharmaceuticals Development Process
03-31 Figure 3.8 Copyright 2013 Pearson Education, Inc. Publishing
as Prentice Hall Slide 32 Keys to Successful Project Portfolio
Management (Brown & Eisenhardt) Flexible structure and freedom
of communication Low-cost environmental scanning Time-paced
transition 03-32 Slide 33 Copyright 2013 Pearson Education, Inc.
Publishing as Prentice Hall Problems in Implementing Portfolio
Management Conservative technical communities Out of sync projects
and portfolios Unpromising projects (HD-DVD vs Blu-ray) Scarce
resources 03-33 Slide 34 3-34 ElephantX Model A 9 Step process 20
questions Project guide Slide 35 Copyright 2013 Pearson Education,
Inc. Publishing as Prentice Hall Summary 1. Explain six criteria
for a useful project-selection screening model. 2. Understand how
to employ checklists and simple scoring models to select projects,
including the recognition of their strengths and weaknesses. 3. Use
more sophisticated scoring models, such as the Analytical Hierarchy
Process. 4. Learn how to use financial concepts, such as the
efficient frontier and risk/return models. 03-35 Slide 36 Copyright
2013 Pearson Education, Inc. Publishing as Prentice Hall Summary 5.
Employ financial analyses and options analysis to evaluate the
potential for new project investments. 6. Recognize the challenges
that arise in maintaining an optimal project portfolio for an
organization. 7. Understand the three keys to successful project
portfolio management. 03-36 Slide 37 03-37 Copyright 2013 Pearson
Education, Inc. Publishing as Prentice Hall
