Essay Question #3: Describe any four types of risk that projects may hold.
Discussion Forum:
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Reflect on the assigned readings for Week 3 and then type a two-page paper regarding what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding. Define and describe what you thought was worthy of your understanding in half a page, and then explain why you felt it was important, how you will use it, and/or how important it is in project management. After submitting your two-page paper as an initial post in the “Reflection and Discussion Forum,” then type at least two peer replies in response to your classmates’ posts (200 word minimum each).
The instructions state
1) define and describe what you thought was worthy of your understanding (about 1/4th of your initial post)
2) explain why you felt it was important, how you will use it, and/or how important it is in project management (about 3/4th of your initial post). The assigned reading is from the textbook so your textbook would need to appear as a source in the first quarter of your post.
This assignment is based upon the assigned reading for the week so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion.
Problem Set Essay:
The assignment is to answer the question provided above in essay form. This is to be in narrative form. Bullet points should not to be used. The paper should be at least 2 pages in length, Times New Roman 12-pt font, double-spaced, 1-inch margins and utilizing at least one outside scholarly or professional source related to project management. This does not mean blogs or websites. This source should be a published article in a scholarly journal (Journal of Project Management) or a professional journal (such as PMI’s Project Management Journal). This source should provide substance and not just be mentioned briefly to fulfill these criteria. The textbook should also be utilized. Do not use quotes. Do not insert excess line spacing. APA formatting and citation should be used.
This essay should be based upon concept(s) and information covered in the weekly reading. As such, the textbook must be a source within your essay in addition to the outside journal article.
The required journal article needs to be used substantively. This means that just a mention or two is not really supporting your answer. Reference section needs to be complete with all required information. Just a few items and a website link (ebsco, etc.) is not sufficient.
Project Management: Achieving Competitive Advantage
Fifth Edition
Chapter 3
Project Selection and Portfolio Management
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
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Learning Objectives
3.1 Explain six criteria for a useful project selection/screening model.
3.2 Understand how to employ a variety of screening and selection models to select projects.
3.3 Learn how to use financial concepts, such as the efficient frontier and risk/return models.
3.4 Identify the elements in the project portfolio selection process and discuss how they work in a logical sequence to maximize a portfolio.
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P M B O K Core Concepts
Project Management Body of Knowledge (P M B o K) covered in this chapter includes:
Portfolio Management (P M B o K 1.4.2)
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Project Selection
Screening models help managers pick winners from a pool of projects. Screening models are numeric or nonnumeric and should have:
Realism
Capability
Flexibility
Ease of use
Cost effectiveness
Comparability
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Screening and Selection Issues (1 of 2)
Risk—unpredictability to the firm
a. Technical
b. Financial
c. Safety
d. Quality
e. Legal exposure
Commercial—market potential
a. Expected return on investment
b. Payback period
c. Potential market share
d. Long-term market dominance
e. Initial cash outlay
f. Ability to generate future business/new markets
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Screening and Selection Issues (2 of 2)
Internal operating—changes in firm operations
a. Need to develop/train employees
b. Change in workforce size or composition
c. Change in physical environment
d. Change in manufacturing or service operations
Additional
a. Patent protection
b. Impact on company’s image
c. Strategic fit
All models only partially reflect reality and have both objective and subjective factors imbedded.
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Approaches to Project Screening
Checklist model
Simplified scoring models
Analytic hierarchy process
Profile models
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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 stimulating discussion.
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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!
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Analytic Hierarchy Process
The A H P is a four step process:
Construct a hierarchy of criteria and subcriteria.
Allocate weights to criteria.
Assign numerical values to evaluation dimensions.
Determine scores by summing the products of numeric evaluations and weights.
Unlike the simple scoring model, these scores can be compared!
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Figure 3.1 Sample A H P with Rankings for Salient Selection Criteria
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Figure 3.4 Profile Model
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Financial Models
Payback period
Net present value
Discounted payback period
Internal rate of return
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Payback Period
Determines how long it takes for a project to reach a breakeven point.
Cash flows should be discounted.
Lower numbers are better (faster payback).
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Payback Period Example (1 of 3)
Table 3.5 Initial Outlay and Projected Revenues for Two Project Options
Blank Project A Revenues Project A Outlays Project B Revenues Project B Outlays
Year 0 Blank $500,000 Blank $500,000
Year 1 $50,000 Blank $75,000 Blank
Year 2 150,000 Blank 100,000 Blank
Year 3 350,000 Blank 150,000 Blank
Year 4 600,000 Blank 150,000 Blank
Year 5 500,000 Blank 900,000 Blank
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Payback Period Example (2 of 3)
Table 3.6 Comparison of Payback for Projects A and B
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Payback Period Example (3 of 3)
Table 3.6 [continued]
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Net Present Value
Projects the change in the firm’s value if a project is undertaken.
Where
Ft = net cash flow for period t
r = required rate of return
I = initial cash investment
pt = inflation rate during period t
Higher N P V values are better!
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Net Present Value Example
Table 3.8 Discounted Cash Flows and N P V (I)
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Table 3.9 Discounted Payback Method
Year Project Cash Flow* Discounted Undiscounted
1 $8,900 $10,000
2 7,900 10,000
3 7,000 10,000
4 6,200 10,000
5 5,500 10,000
Payback Period 4 Years 3 Years
*Cash flows rounded to the nearest $100.
Discount sum of cash flows by the company’s required rate of return to get a more accurate payback period.
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Internal Rate of Return
A project must meet a minimum rate of return before it is worthy of consideration.
Higher I R R values are better!
where
A C F t = annual after tax cash flow for time period t
I O = initial cash outlay
n = project’s expected life
I R R = the project’s internal rate of return
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Internal Rate of Return Example
This table has been calculated using a discount rate of 15%.
Year Discount Factor Inflows Discount Factor at 15% Discount Factor N P V
1 $2,500 .870 $2,175
2 2,000 .756 1,512
3 2,000 .658 1,316
Present value of inflows Blank Blank 5,003
Cash investment Blank Blank 5,000
Difference Blank Blank $ 3
The project does meet our 15% requirement and should be considered further.
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Project Portfolio Management
The systematic process of selecting, supporting, and managing the firm’s collection of projects.
Portfolio management objectives and initiatives require:
decision making
prioritization
review
realignment
reprioritization of a firm’s projects
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The Portfolio Selection Process
The portfolio selection process is an integrated framework of interrelated steps and activities.
Preprocess Phase
Methodology of selection and strategy
Process Phase
Prescreening, individual project analysis, screening, portfolio selection, and portfolio adjustment
Postprocess Phase
Project development, project evaluation, and portfolio completion
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Figure 3.8 Project Portfolio Selection Process
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Developing a Proactive Portfolio
The project portfolio matrix classifies projects into four types according to commercial potential and technical feasibility:
Bread and butter
Pearls
Oysters
White elephant
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Figure 3.9 Project Portfolio Matrix
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Keys to Successful Project Portfolio Management
Flexible structure and freedom of communication
Low-cost environmental scanning
Time-paced transition
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Problems in Implementing Portfolio Management
Conservative technical communities
Out-of-sync projects and portfolios
Unpromising projects
Scarce resources
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Summary
Explain six criteria for a useful project selection/screening model.
Understand how to employ a variety of screening and selection models to select projects.
Learn how to use financial concepts, such as the efficient frontier and risk/return models.
Identify the elements in the project portfolio selection process and discuss how they work in a logical sequence to maximize a portfolio.
Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved
Copyright
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