{"id":21853,"date":"2017-03-20T18:15:46","date_gmt":"2017-03-20T12:45:46","guid":{"rendered":"https:\/\/www.whizlabs.com\/?p=21853"},"modified":"2024-05-17T09:48:01","modified_gmt":"2024-05-17T04:18:01","slug":"pmp-project-selection","status":"publish","type":"post","link":"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/","title":{"rendered":"PMP : Quantitative Approach to Selecting the Right Project"},"content":{"rendered":"<p dir=\"ltr\">We are publishing series of articles on PMP topics to help the <a href=\"https:\/\/www.whizlabs.com\/blog\/pmp-certification\/\">PMP exam preparation<\/a>. In this article we are going to explain you what are the best approaches\u00a0and methods for choosing a right project for the organizations.<\/p>\n<ul>\n<li><a href=\"https:\/\/www.whizlabs.com\/project-management-professional-pmp\/pmp-free-test\/\">TRY NOW : 50 PMP Practice Questions\u00a0<\/a><\/li>\n<li><a href=\"https:\/\/www.whizlabs.com\/project-management-professional-pmp\/pmp-online-course\/\">Access our 487 mins Self-Study Training (Get 35 contact hours certificate)\u00a0<\/a><\/li>\n<\/ul>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">Even before a project is initiated, there are number of activities that take place. A company\u2019s strategic objectives could drive the initiation of a new project. \u00a0The reason a project starts could be many but mainly it is to cater to the company\u2019s business needs.<\/span><\/p>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">It\u2019s possible that a product requires a change due to customer demands, or the current technology update drives the organization to decommission an old system and roll out a new one, alternatively, a start-up becomes a project in itself in the beginning. We could list out a series of examples of why a project starts, but in most scenarios we\u2019ll find one thing common; Business drives the need for new projects.<\/span><\/p>\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_76 ez-toc-wrap-left counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ea7e02;color:#ea7e02\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ea7e02;color:#ea7e02\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/#What_is_a_Project\" >What is a Project?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/#How_to_Select_the_right_project\" >How to Select the right project?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/#Project_Selection_Methods\" >Project Selection Methods<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/#Practice_Questions\" >Practice Questions<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/#Summary\" >Summary<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.whizlabs.com\/blog\/pmp-project-selection\/#References\" >References<\/a><\/li><\/ul><\/nav><\/div>\n<h2><span class=\"ez-toc-section\" id=\"What_is_a_Project\"><\/span>What is a Project?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<blockquote>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">By the definition of a project as stated in the guide for project management PMBOK, 5<\/span><span style=\"font-weight: 400;\">th<\/span><span style=\"font-weight: 400;\"> edition, a project is a temporary endeavor undertaken to create a unique product, service or result. (Std. Def.)<\/span><\/p>\n<\/blockquote>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">A project is temporary, which means it has a beginning and an end. A project creates unique results. A need for a project could be of internal or external influence in nature. As per the guide to project management PMBOK 5<\/span><span style=\"font-weight: 400;\">th<\/span><span style=\"font-weight: 400;\"> edition, some key reasons <strong>why a project is created<\/strong> are listed below:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Organizational need<\/b><span style=\"font-weight: 400;\"> \u2013 Sometimes organizations have a problem to solve which gives rise to the initiation of a new project. It can also be termed as Business Need. It is alternatively also a strategic opportunity for the company to grow. Most often these projects solve problems internal to the organization. For e.g. If the company has grown in terms of employees, it may want to transition from a manual HR set-up, to an automated HR system.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Market Demand<\/b><span style=\"font-weight: 400;\"> \u2013 Those projects that a company takes up due to its high market presence in the current stream. This is also external influence to which the organization responds by tapping the opportunity. For e.g., the digital marketing agency decides to launch a new portfolio in E-Commerce due to the booming market of online shopping and e-commerce industry.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Customer Request<\/b><span style=\"font-weight: 400;\"> \u2013 Sometimes the need for a new project arises due to a change request in your product or the users of the product requested some new feature during a survey taken by the organization. For e.g. a banking product being run by a company in Financial technology received a request from the bank to increase the security of product by introducing one more line of verification while the transactions happen online.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Technological Advance<\/b><span style=\"font-weight: 400;\"> \u2013 As the name suggests, this requirement is totally based on the requirement of a company to progress itself with technology. In today\u2019s times of dynamic technology trends the organizations need to be competitive enough to adopt new technologies every few years to keep up with the pace of the market. For e.g. when a company realizes that its user base has increased drastically over the few years, it initiated a project to migrate its data-warehouse project to Big-data technology for more flexibility, more storage and versatility in storing different types of data in one data-lake. <\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Legal Requirements<\/b><span style=\"font-weight: 400;\"> \u2013 Another external influence that causes an organization to initiate a project that becomes necessary to be carried out due to its legal implications. These kinds of projects are a response to compliance, regulatory or legal issues. For e.g. a company in construction while starting a new project ignored the government compliance policy on leaving a measured amount of space for sewage. Due to the legal constraint, they had to revisit their architecture to initiate a new project in design.<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Ecological impacts<\/b><span style=\"font-weight: 400;\"> \u2013 Some companies make sure to follow the environmental safety sincerely. When they initiate a project they keep in mind its ecological impact and work around it to ensure that our environment is not harmed in any way. For e.g. XYZ corporation launched its \u2018Go Green\u2019 campaign and to ensure its employees took it seriously, they initiated a new project to go paperless and therefore decided to move all the company\u2019s records and documentation to an organized data center and set-up a centralized server to access it.<\/span><\/li>\n<li><b id=\"docs-internal-guid-4267ec75-e41f-ada0-6187-ff55a7e0f540\"><b>Social needs<\/b><span style=\"font-weight: 400;\"> \u2013 The projects initiated due to Social needs. Those projects that are taken up mostly by non-profit organizations or any organization for that matter, to cater to certain social needs. For e.g. a fortune 500 company recently initiated a project to re-habilitate around 500 people who lost their homes in the recent flood.<\/span><\/b><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"How_to_Select_the_right_project\"><\/span>How to Select the right project?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p dir=\"ltr\"><b>Feasibility Study:\u00a0<\/b><span style=\"font-weight: 400;\">Once the project is in context, we need to understand if it\u2019s feasible to carry out the project. It is termed as <\/span><b>Feasibility study<\/b><span style=\"font-weight: 400;\">. A project requires resources and investment. To analyze if we have or can manage the kind of resources required by the project in context, or that our consideration to investment is in the right direction, feasibility study becomes mandatory. To perform feasibility analysis we must focus of 2 entities- one is the body that will perform the feasibility studies and second is to determine list of criteria for project selection.<\/span><\/p>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">To address the first one, one of the two bodies within an organization performs the feasibility study:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>PMO<\/b><span style=\"font-weight: 400;\"> \u2013 As per <a href=\"http:\/\/www.pmi.org.in\/\" target=\"_blank\" rel=\"noopener\">PMI<\/a>, a group or department within a business, agency or enterprise that defines and maintains standards for\u00a0project management\u00a0within the organization is known as a\u00a0project management office (PMO). This office is also accountable for standardizing and the execution of projects and introducing financial analysis in to projects. PMO has many potential roles to play as a contributor to advancing the areas of project, program<\/span> <span style=\"font-weight: 400;\">and portfolio management. Project selection is one of its responsibilities<\/span><\/li>\n<li style=\"font-weight: 400;\"><b>Project Portfolio Committee<\/b><span style=\"font-weight: 400;\"> \u2013 is also known as Project selection committee or Project evaluation committee. Just as the name suggests, this committee is responsible selecting new projects, prioritizing projects, making project closure decisions, measuring the existing project\u2019s progress etc. In addition this committee is also responsible for making financial and non-financial analysis contribution towards initiating a project. In some organization, they are also called portfolio steering committee.<\/span><\/li>\n<\/ul>\n<p dir=\"ltr\"><b>Criteria for Project Selection:\u00a0<\/b><span style=\"font-weight: 400;\">There are many variables to be considered while selecting a project. The project selection team focuses on the criteria relevant to their organization. They could consider analyzing few of the following or all of the following criteria from the given list:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Does the project align to company\u2019s strategic alignment<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Environmental Factors to be considered<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Financial benefit that is expected from taking up the project<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Funding available for the project<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Resource availability for the project<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Risks associated with taking up \u00a0the project<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">If the project balances out with the portfolio under which it is being considered<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Volume of the project \u2013Too large or too small or apt.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Other non-financial benefits, associated with taking up the project<\/span><\/li>\n<\/ul>\n<h2><span class=\"ez-toc-section\" id=\"Project_Selection_Methods\"><\/span><b>Project Selection Methods<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Once the selection team starts their feasibility study, they also focus on quantifying their values of analysis in their presentation. They should be able to provide their findings in terms of financial metrics. They can approach towards this goal using the project selection methods, which helps in measuring the value of what the product, service, or the result of the project will produce.<\/p>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">Before we move on to describing these methods, there are a few finance related terms we should know:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><b>Present Value &#8211; <\/b><span style=\"font-weight: 400;\">The value of a sum of money in the present, as compared to its value in future, when an interest is charged on it, upon investment. It calculates how much a future sum of\u00a0<\/span><span style=\"font-weight: 400;\">money<\/span><span style=\"font-weight: 400;\">\u00a0is worth today.\u00a0<\/span><\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">PV = FV\/ (1+r)<\/span><\/i><i><span style=\"font-weight: 400;\">n<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">FV = cash flow in future period, r = the periodic rate of return or interest (also called the discount rate or\u00a0or the required rate of return)<\/span><\/i><i><span style=\"font-weight: 400;\"><br \/>\n<\/span><\/i><i><span style=\"font-weight: 400;\">n = number of periods<\/span><\/i><\/p>\n<\/blockquote>\n<p>&nbsp;<\/p>\n<ul>\n<li><b><b>Opportunity cost \u2013 <\/b><span style=\"font-weight: 400;\">Opportunity Cost is the value of the project given up\u00a0when choosing another project over it.<\/span><b> \u00a0<\/b><span style=\"font-weight: 400;\">When an organization chooses between two projects, they are giving up the money that could have been earned on the project they didn\u2019t choose. That\u2019s called opportunity cost. It\u2019s the price we pay for choosing one project over another.<\/span><\/b><\/li>\n<\/ul>\n<ul>\n<li style=\"font-weight: 400;\"><b>Sunk cost<\/b><b> \u2013 <\/b><span style=\"font-weight: 400;\">Sunk Cost is the cost that has already been spent\u00a0which cannot be recovered.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"font-weight: 400;\"><b>Depreciation<\/b> <span style=\"font-weight: 400;\">&#8211; <\/span><span style=\"font-weight: 400;\">Depreciation is<\/span><b> <\/b><span style=\"font-weight: 400;\">the decrease in value of assets over time.<\/span> <span style=\"font-weight: 400;\">The decrease in value can be attributed to many factors like wear and tear or getting out-dated. For e.g. a manufacturing unit could depreciate for various reasons like\u00a0loss of efficiency, becoming\u00a0out of date, new model coming out, etc.<\/span><\/li>\n<\/ul>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">In general there are two categories in which the <\/span><b>project selection methods<\/b><span style=\"font-weight: 400;\"> can be divided:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\"><strong>Mathematical Models<\/strong> \u2013 Mathematical models use a set of defined steps to solve a problem. They use Linear, Non-linear, Dynamic, Algorithms and other mathematical formulae to quantify their observations. As this approach requires specialized skills in mathematics or statistics, it has been kept beyond the scope of PMP and the guide to <a href=\"http:\/\/www.pmi.org\/PMBOK-Guide-and-Standards.aspx\" target=\"_blank\" rel=\"noopener\">PMBOK<\/a>.<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Decision Models, alternatively called Benefit Measurement Methods are used in analyzing and comparing project selection decisions. It helps the team focus on calculation expected revenue and benefits generation against the cost incurred by the organization. High complexity projects generally could involve more than one benefit measurement method. The list of techniques that fall under this umbrella is given below:<\/span><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><b>Cost-Benefit Analysis<\/b><span style=\"font-weight: 400;\"> \u2013 Comparing the rough estimation of expected costs against the tangible benefits for the organization, listed and quantified. Benefit-Cost ratio is the ratio of the benefits expected from the project compared to\u00a0the costs\u00a0estimated in terms of Present\u00a0Value (PV).<\/span><b> <\/b><span style=\"font-weight: 400;\">The higher the BCR value, the better it is for the project. Positive BCR value refers to profit and negative BCR value means loss.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">Benefit-Cost Ratio (BCR) = Benefits (in terms of PV) \/ Costs (in terms of PV)<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">Interpretation of\u00a0Benefit-Cost Ratio (BCR):<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">BCR &gt; 1\u00a0\u2014 the project is\u00a0profitable,\u00a0and the higher the BCR the better<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">BCR = 1\u00a0\u2014 the project will break even<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">BCR &lt; 1\u00a0\u2014 the project will cause the organization to lose money and is generally considered as not a good investment<\/span><\/i><\/p>\n<\/blockquote>\n<p>&nbsp;<\/p>\n<ul>\n<li><b><b>Scoring Models<\/b><span style=\"font-weight: 400;\"> \u2013 Scoring models, also known as weighted scoring model calculates by applying weight-age to the scores assigned to a criteria or factor. These factors are weighted and scored depending on most significant to least significant. This technique of scoring is also used in choosing between the bids from 3<\/span><span style=\"font-weight: 400;\">rd<\/span><span style=\"font-weight: 400;\"> party vendors.<\/span><\/b><\/li>\n<\/ul>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><b>Return on Investment<\/b><b> \u2013 <\/b><span style=\"font-weight: 400;\">It\u2019s the benefit generated by the investment compared against\u00a0profits in relation to the invested capital.<\/span> <span style=\"font-weight: 400;\">The\u00a0higher\u00a0the Return on Investment, the better\u00a0is the project financially to the organization.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">Return on Investment = Net profit\u00a0\/\u00a0Capital Invested<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">Net profit is generally represented as net present value [NPV] <\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">If ROI is larger than 1, the project is deemed to be profitable. <\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">If ROI is smaller than 1, the project loses money.<\/span><\/i><\/p>\n<\/blockquote>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><b>Cash-flow analysis techniques<\/b><span style=\"font-weight: 400;\"> \u2013 The process of examining the financial statement which reflects the total cash in-flow and cash out-flow of a business in a particular accounting period is known as Cash-flow analysis. A cash flow statement is one of the most important financial statements of a company. The balance on the statement is the net cash flow at a specific point in time. Some cash-flow analysis techniques are listed below:<\/span>\n<ul>\n<li style=\"font-weight: 400;\"><b>Payback-period &#8211; <\/b><span style=\"font-weight: 400;\">The length of time required by the organization to recover the cost of an investment made in to a project. \u00a0This method compares the initial investment to the cash inflows expected over the life of the project. The payback period is not as precise as other cash flow calculations. Shorter the Payback Period, the project is financially better to the organization.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">Payback Period = Investment \/ Cash-flow (Periodic)<\/span><\/i><\/p>\n<\/blockquote>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><b>Discounted Cash flows \u2013 <\/b><span style=\"font-weight: 400;\">There is a time value associated with money. To clearly explain, if you received some money today, that money\u2019s worth is higher than the money you receive in future. \u00a0The worth of money that we receive in future can be termed as Future Value (FV).<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">FV=PV (1+i)<\/span><\/i><i><span style=\"font-weight: 400;\">n<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">Where \u2018I\u2019 is for rate of interest on present value and n is the number of time periods for which the FV is being calculated<\/span><\/i><\/p>\n<\/blockquote>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><b>Net Present Value <\/b><span style=\"font-weight: 400;\">(NPV)<\/span><b> &#8211; <\/b><span style=\"font-weight: 400;\">This is the actual value of the project, at a given time minus all of the costs incurred. This includes the time and effort cost of building it as well as the materials cost. Net\u00a0Present Value is the sum\u00a0of all\u00a0cash inflows of the\u00a0project minus the initial cost.\u00a0 The\u00a0larger\u00a0the Net Present Value, the project is profitable to the organization<\/span><span style=\"font-weight: 400;\">. <\/span><span style=\"font-weight: 400;\">This is the total capital invested minus all expenditure.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">PV (benefits) \u2013 PV (costs)<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">NPV &gt; 0\u00a0\u2014 the project is profitable<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">NPV = 0\u00a0\u2014 the project will break even<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">NPV &lt; 0\u00a0\u2014 the project will lose money<\/span><\/i><\/p>\n<\/blockquote>\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"list-style-type: none;\">\n<ul>\n<li style=\"font-weight: 400;\"><b>Internal Rate of Return (IRR) &#8211; <\/b><span style=\"font-weight: 400;\">The interest rate at which the cash inflow and\u00a0cash outflow of the project equals zero is the internal rate of return. \u00a0It refers to the amount of money the project has to return to the company that is funding it. It shows the amount of money a project is making for the company. It\u2019s usually expressed as a percentage of the funding that has been allocated to it.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<blockquote>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">0 = F0 + F1\/ (1+IRR) + F2\/ (1+IRR) 2+ F3\/ (1+IRR) 3+ . . . +Fn\/ (1+IRR)<\/span><\/i><\/p>\n<p dir=\"ltr\"><i><span style=\"font-weight: 400;\">N\u00a0is\u00a0number of periods;\u00a0F is cash flow.<\/span><\/i><\/p>\n<\/blockquote>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">It\u2019s complicated to initially get a hang of this calculation; however, once you get a hang of it, it is easier. Besides for the PMP exam purposes, there are 3 major pointers of IRR that we must remember:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">We must choose projects with highest IRR value<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">When NPV=0, IRR is the discount rate<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Cash-inflows are invested at the IRR value.<\/span><\/li>\n<\/ul>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">Some of the non-financial metrics that we consider while selecting a project are Customer satisfaction, employee satisfaction and retention, organizational learning, continuous improvement.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Practice_Questions\"><\/span>Practice Questions<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">You are given to choose between a Project ABC, with a payback period of 1 yr and another Project XYZ with a payback period of 3 yrs, which one should you consider choosing?<\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Project ABC<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Project XYZ<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Let the board members choose<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">None of the Above<\/span><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\"> \u00a0<\/span> <span style=\"font-weight: 400;\">Answer. \u00a0a<\/span><\/p>\n<ol start=\"2\">\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">The PMO of your organization has received three project proposals. However, due to the constraints of costs, only one project can be chosen. Project A would have a NPV of \u00a0US$200,000, Project B would have a NPV of US$220,000 while Project C would have a NPV of US$50,000.\u00a0What is the opportunity cost of choosing the project with the highest NPV?<\/span>\n<ol>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">$220,000<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">$50,000<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">$200,000<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">$250,000<\/span><\/li>\n<\/ol>\n<\/li>\n<\/ol>\n<p dir=\"ltr\"><span style=\"font-weight: 400;\">Answer. \u00a0d<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Summary\"><\/span>Summary<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li><a href=\"https:\/\/www.whizlabs.com\/project-management-professional-pmp\/pmp-free-test\/\">TRY NOW : 50 PMP Practice Questions\u00a0<\/a><\/li>\n<li><a href=\"https:\/\/www.whizlabs.com\/project-management-professional-pmp\/pmp-online-course\/\">Access our 487 mins Self-Study Training (Get 35 contact hours certificate)\u00a0<\/a><\/li>\n<li><a href=\"https:\/\/www.whizlabs.com\/project-management-professional-pmp\/pmp-practice-tests\/\" target=\"_blank\" rel=\"noopener\"><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;PMP mock exam&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:14849,&quot;3&quot;:{&quot;1&quot;:1},&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:3,&quot;3&quot;:1},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:11}\">PMP mock exam<\/span><\/a><\/li>\n<\/ul>\n<p>In this article we have explained what is a project, how to select a right project and what are the different models to measure and choose the right project. I hop this article would have given good idea on project initiation concepts that are tested in PMP exam. However, this is only the basic details and you have to go through the complete chapter in PMBOK to get more understanding on the concepts.<\/p>\n<p>If you have any questions, please write it in the comments section.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"References\"><\/span><b>References<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">PMBOK 5<\/span><span style=\"font-weight: 400;\">th<\/span><span style=\"font-weight: 400;\"> Edition \u2013 (Project Management Body of Knowledge) &#8211; PMI<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Project Management Professional Exam study Guide- 5<\/span><span style=\"font-weight: 400;\">th<\/span><span style=\"font-weight: 400;\"> Edition \u00a0&#8211; Kim Heldman<\/span><\/li>\n<li><span style=\"font-weight: 400;\">PMP Certification- ALL-IN-ONE for Dummies (a wiley brand) \u2013 Cynthia Snyder<\/span><\/li>\n<li><span style=\"font-weight: 400;\">PMP Headfirst- 3<\/span><span style=\"font-weight: 400;\">rd<\/span><span style=\"font-weight: 400;\"> Edition- O\u2019Reilly- Jennifer Greene and Andrew Stellman<\/span><\/li>\n<\/ul>\n<p><strong>If you are looking for any help in preparing for the PMP certification exam, please call too our customer support or send a mail. \u00a0<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>We are publishing series of articles on PMP topics to help the PMP exam preparation. In this article we are going to explain you what are the best approaches\u00a0and methods for choosing a right project for the organizations. TRY NOW : 50 PMP Practice Questions\u00a0 Access our 487 mins Self-Study Training (Get 35 contact hours certificate)\u00a0 Even before a project is initiated, there are number of activities that take place. A company\u2019s strategic objectives could drive the initiation of a new project. \u00a0The reason a project starts could be many but mainly it is to cater to the company\u2019s business [&hellip;]<\/p>\n","protected":false},"author":13,"featured_media":95869,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_uag_custom_page_level_css":"","site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"default","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"default","adv-header-id-meta":"","stick-header-meta":"default","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"set","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"var(--ast-global-color-4)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"categories":[26],"tags":[3995,1235],"class_list":["post-21853","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-project-management","tag-pmp-mock-exam","tag-pmp-preparation"],"uagb_featured_image_src":{"full":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",725,282,false],"thumbnail":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project-150x150.jpg",150,150,true],"medium":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project-300x117.jpg",300,117,true],"medium_large":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",725,282,false],"large":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",725,282,false],"1536x1536":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",725,282,false],"2048x2048":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",725,282,false],"profile_24":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",24,9,false],"profile_48":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",48,19,false],"profile_96":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",96,37,false],"profile_150":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",150,58,false],"profile_300":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project.jpg",300,117,false],"tptn_thumbnail":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project-250x250.jpg",250,250,true],"web-stories-poster-portrait":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project-640x282.jpg",640,282,true],"web-stories-publisher-logo":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project-96x96.jpg",96,96,true],"web-stories-thumbnail":["https:\/\/www.whizlabs.com\/blog\/wp-content\/uploads\/2017\/03\/pmp-selecting-right-project-150x58.jpg",150,58,true]},"uagb_author_info":{"display_name":"Pavan Gumaste","author_link":"https:\/\/www.whizlabs.com\/blog\/author\/pavan\/"},"uagb_comment_info":7,"uagb_excerpt":"We are publishing series of articles on PMP topics to help the PMP exam preparation. In this article we are going to explain you what are the best approaches\u00a0and methods for choosing a right project for the organizations. TRY NOW : 50 PMP Practice Questions\u00a0 Access our 487 mins Self-Study Training (Get 35 contact hours&hellip;","_links":{"self":[{"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/posts\/21853","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/users\/13"}],"replies":[{"embeddable":true,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/comments?post=21853"}],"version-history":[{"count":2,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/posts\/21853\/revisions"}],"predecessor-version":[{"id":95871,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/posts\/21853\/revisions\/95871"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/media\/95869"}],"wp:attachment":[{"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/media?parent=21853"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/categories?post=21853"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.whizlabs.com\/blog\/wp-json\/wp\/v2\/tags?post=21853"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}