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Performing Project Selection And Assessment

Most organizations don’t have the luxury of performing every projects that is proposed. Even Consulting organizations that sell project management services must pick and choose the projects on which they want to work. Selection and evaluation methods help organization decide among alternative project and determine the tangible benefits to the company of choosing or not choosing a project.

Project Selection Methods

The process of investing money as well as reinvesting the interest earned there on is called compounding. The future value or compounded value of an investment after ‘n’ years when the interest rate is r% is given by the formula FV = PV (1+r)^n where FV is the future value and PV is called the present value

Present value is calculated by the formula PV = FV / (1+r)^n where FV is the Future value.

Net present value of a project is the sum of present value of all cash flows

Net Present Value = Sigma FV/(1+r)^n.

Accept if NPV > 0 and reject if NPV < 0.

Payback Period is the length of time required to recover the initial cash outlay , payback period is ideally to be shorter  the better.

Example of Calculation of Future Value:-

  • If $100,000 were invested for 5 years and managed to earn a interest of 6 % per year compounded annually it will be worth $133,822.60
  • FV = 100,000(1+0.06)^5
  • FV=100,000(1.06*1.06*1.06*1.06*1.06)
  • FV=133,822.60
  • The future value of the $100,000 five years from now is $133,822.60

Example of Calculation of Present Value :

  • In other words if a Project says it will be earning the organization $160,000 per year in five years ,that’s great but what is $160,000 five years from now really worth today?
  • Let us use the formula assuming interest rate is still 6%-PV=FV/(1+i)^n
  • PV=160,000(1.06*1.06*1.06*1.06*1.06)
  • PV=$119,561 so $160,000 is really worth $119,561 today if we had four different projects of varying time to completion, cost and project cash inflows at completion we calculate the present value and choose the project with the best present value as it is likely the best investment for the organization

In this article there are important pointers given for Project Selection and Assessment and how to use formulas to calculate the Present value and Future Value and depending on this results we can select the project suitable, in case of any queries and comments the Author Suresh Menon can be Contacted at suresh@digitalstream.in or at testconsultants@outlook.com.