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Peer review is yet another method of project selection. In this method you present the project proposal to the peers in the organization. You select peers from a wide range of project management fields. These peers review the project and then recommend some best practices adopted in other projects. The peers also check for the viability of the project.

Peer review is the method of project selection that you use to validate the project with the help of peers. The peer group in such reviews are experts from various areas of project management, however, unlike the murder board, this group is not as ruthless in reviewing a project. In this method, the main objective is not to kill the project but to check the viability of the project and add value from learning of the peer group.

In your personal capacity, you tend to ignore or get biased about your ideas. As a result, you might not foresee an issue arising later in the project life cycle. To avoid such unpleasant scenario, it is always a good idea to get inputs from the peers at an early stage. The peer review method comes handy in such situations. Peers can help identifying each other’s mistakes quickly and easily, and provide suggestion from their past experience.

You create a peer group of subject matter experts from different areas to perform a peer review. These subject matter experts help in defining a benchmark for the current practices in the organization. Additionally, they help in identifying and recognizing the industry best practices being used in similar projects.

Peer Review Panel

Selecting an appropriate peer review panel is a very important factor for the success of the review and the project as a whole. You must take utmost care when selecting a peer reviewer for the panel. Following are some of the guidelines you can consider for a peer reviewer panel:

• The members of the peer review panel must be subject matter experts in their respective area.
• The members of the peer review panel must the ones who are respected across the organization, including the senior management. This is especially helpful to make sure that their views are considered seriously and can influence senior management to make any changes.
• The peer review panel must make sure that the peer review is conducted to improve the probability of the success of the project. The peer review panel must understand that a peer review is a collaborative effort among the project team, senior management, and peer review panel. The project and senior management teams must believe that the peer reviews are going to help the project and keep an open mind towards the suggestions from the peer review panel.
• You must conduct peer reviews multiple times before and after you have started the project. This makes sure that not only you select an appropriate project but also check the performance of the project and take corrective action, if necessary.

Conducting a Peer Review

An effective peer review is a key to the success of a project. When conducting a peer review, you complete the following procedure:

1. Prepare a questionnaire and get responses from the members of the peer review panel. Make sure that you cover each and every aspect of the project in the questionnaire.
2. Collect the responses and analyze the same. It is important for you to analyze and understand the perspective of members of various teams.
3. Conduct interviews to get detailed information from all levels of the team.
4. Document the findings of the questionnaire and derive a conclusion.
5. Prepare a final report and present it to the senior management.

It is very important for an organization to select an appropriate project that aligns to its business objectives. In a moderate to big organization, you get several ideas waiting to be converted into a project. However, not every idea is worth pursuing as a project because running a project not only needs resources but also financial investments to support it.

In your personal life, you have various options available to make a decision when making a choice among various options available, such as your past experience, advice from your family and friends, and suggestions from some experts. In your personal life, you have the luxury of going wrong and changing your decision.

However, in a professional life, an incorrect decision might be sufficient enough to throw you out of the business. Therefore, you have take utmost care when selecting a project. As a result, you must follow some tried and tested rules to select a project to minimize chances of selecting a wrong project, and select a project that is less risky and ensures maximum returns for the investment.

One of the techniques you can use to select a project is a benefit measurement method of project selection. The main objective of a benefit measurement method is to select a project with an aim to realize benefits against the investment you make in a project. In this method, you collect, consolidate, and analyze data to measure if the project yields the expected benefits.

By using a benefit measurement method, you select a project depending on the present value of the investment and revenue generated by the project. You calculate the cost and benefits of each project and then compare the same to decide on the project that provides highest benefits.

You can use the following benefit measurement methods to select a project:

• Murder Board Method: In this method, you constitute a murder board. The board comprises of senior managers and subject matter experts. The murder board scrutinizes the project to find reasons why the project should not be selected. You must defend the project and counter all the queries. To know more about this method, refer Murder Board Method of Project Selection.
• Peer Review Method: In this method, you select peers from a wide range of project management fields. These peers review the project and then recommend some best practices adopted in other projects. The peers also check for the viability of the project. To know more about this method, refer Peer Review Method of Project selection.
• Scoring Model: In this method, you create a committee that lists the relevant criteria to select a project. The committee weighs the list according to the importance and priorities of each project under consideration. The committee then adds the weighted values and selects a project with highest score. To know more about this method, refer Scoring Model of Project Selection.
• Economic Models: In this method, you scrutinize the project for its economic returns and viability. To know more about these models, refer An Overview to Economic Model of Project Selection.
• Economic Value Added: In this method, you create a performance metrics for the project that calculates the worth created for the organization. To know more about this method, refer Economic Value Added.
• Opportunity Cost: In this model, you calculate the opportunity you give up by selecting a project over the candidate projects. To know more about this model, refer Opportunity Cost.

Scoring model is yet another method of project selection. In this method, you create a committee that lists the relevant criteria to select a project. The committee weighs the list according to the importance and priorities of each project under consideration. The committee then adds the weighted values and selects a project with highest score.

One of the most common techniques used to select a project is the individual judgment. Such judgments are mostly a result of a guess work and might turn out to be biased in favor or against a project. As a result, the project can result in a failure if it gets biased favor. Similarly, you might drop a really great project if it is unfavorably biased.

To avoid such a situation, you can create a scoring model that can help you to make an appropriate decision to select a project based on the merits and priorities of the project and organization.

Principles

When creating a scoring model for selecting a project, you must consider the following principles of a scoring model:

• Try to limit scoring criteria into approximately three categories of requirements. You can select any of the categories, such as benefits, cost, size, impact, risk, technical feasibility, margin, or any other category that you deem fit to score the project requirements.
• Scoring criteria should comprise of ranges. When deciding on the scoring criteria, you can select any of the following types of ranges:
  • Numeric or Cardinal Priority range: In this type of range, you assign numeric values for scoring. Following are sample values with respective description to understand the values:
    • 0 – The requirement is not applicable to the project and is later removed from the list.
    • 1 – The requirement has a low priority.
    • 3 – The requirement has a medium priority and must be met.
    • 5 – The requirement has the highest priority and is essential for the project.

Depending on the number of choices, you can also consider the 0 – 10 range as a scoring criteria.

• Descriptive or Ordinal Priority range: In this type, you provide a descriptive priority, which you convert to an appropriate numeric value for further calculations. This criteria is more useful in the sense that for the numeric priority type, you must remind the team that 0 is the least favorable value while 5 is the most favorable value to make sure that there is no misinterpretation across the team. However, in this priority type, you use self explanatory values to score. Following are sample values with respective description to understand the values:
  • Not Applicable (0): The requirement does not apply for the project. The requirement is later removed from the list.
  • Nice to Have (1): The requirement is at a low priority. If included in the project, it is considered as an add-on requirement.
  • Important (3): The requirement is important for the project and must be addressed in the product.
  • Essential (5): The requirement is a must for the project and must be addressed in the product.
• You must design scoring to address the business requirements of the organization.
• You must test the scoring model with existing projects to make sure that it produces accurate results.
• You must run the scoring model through cross functional teams capable of making decision to make sure you get unbiased results.

Calculation

After you have taken responses for each requirement, you calculate the score of individual requirement by multiplying the number of responses with the priority. This is the weighted score for the requirement. Now that you have the weighted average for the projects, you can select the one that has the highest score.

The benefit cost ratio is yet another economic model of project selection. In this economic model, you calculate the ratio between the cost of the project and benefits form the project. The benefits include all forms of revenue you generate from the project and not just the profits. A benefit cost ratio greater than one indicates that projects generates more benefits than the cost incurred.

You use the benefit cost ratio method to identify relationship between possible benefits and costs of the project. You use this method to measure qualitative as well as the quantitative factors. This is so, because at times you cannot exclusively measure benefits and costs in financial terms.

You calculate the benefit cost ratio by dividing the total discounted value of the benefits by the total discounted value of the costs. To calculate the discounted value of each, you use the present value formula for the each. To know more about calculating present value, refer Economic Model for Project Selection – Present Value.

The following table interprets the value of the benefit cost ratio:

For example, you need to invest $ 10,000 in a project that is expected to generate revenues worth $ 5,000 for each year in next three years starting the third year of the project. To decide if you should consider this project, you need to calculate the benefit cost ratio, considering that the prevailing rate of interest is 10%.

To calculate the benefit cost ratio, you first need to calculate the present value of benefits as well as costs.

Present value of costs = $ 10,000 (You make an outright investment at the beginning of the project.)

Present value of benefits = 5,000 / (1.1)³ + 5,000 / (1.1)⁴ +5,000 / (1.1)⁵

= 3,756 + 3,415 + 3,104

= 10,275

Benefit cost ratio = Present value of benefits / present value of costs

= 10,275 / 10,000

= 1.0275

Notice that the benefit cost ratio for the project is marginally more than one. Therefore, you can expect very low amount of profits from this project. If any of the candidate projects has a better benefit cost ratio, you should not consider this project.

You can use this method to compare the benefit cost ratio of the candidate projects and select the one that has a benefit cost ratio better than other projects, and is significantly greater than one. Additionally, you can use this method to make other decisions when making an investment. For example, if you need to consider outright purchase of the equipment with respect to leasing the same for the project, you can use the benefit cost ratio to analyze which investment option is better to select.

Payback period is yet another economic model for project selection. Payback period refers to the number of time periods that a project requires to recover your investment. When you have recovered the project investment, it is known as the break even point. At this point, the project is neither at profit nor at loss. After you have recovered the investment, the revenue generated from the project contributes to the profits from the project.

Payback period is usually calculated in years. For example, if you have invested $ 5,000 in a project and the project generates revenue of $ 2,000 in the second year and $ 3,000 in the third year, then the payback period of the project is three years.

Practically, it is not always that a project generates revenue adds exactly equal to the investments made. The amount of revenue that project generates over the year usually varies. In such a case, you calculate the payback period of the project as the year when the difference between the cumulative revenue and investment is a positive value.

For example, consider a project in which you have invested $ 10,000 in a project and the project generates revenue of $ 1,000 in the first year, $ 3,000 in the second year, $ 3,000 in the third year, $ 4,000 in the fourth year, and $5,000 in the fifth year. In this project, notice that project starts returning positive value after four years (1,000 + 3,000 + 3,000 + 4,000 – 10,000). Therefore, the payback period for the project is four years.

It is easier to calculate the payback period when you already know the revenue returns. However, you need to calculate payback period even before you have selected the project. Based on the payback period, you evaluate if the project is even worth considering. Therefore, to calculate the payback period, you consider the estimated values for annual revenue generation from the project and use the following formula:

Payback period = 1 + n_y – n/p

Here:

• n is the value of the cumulative revenue generated when the last negative value is expected.
• n_y is the number of years after the initial investment when the last negative value is expected.
• p is the value of revenue when the first positive value of the cumulative revenue is expected.

The payback period method provides you a bird’s eye view of the risk analysis about the time period for which the initial investment is at risk. You use this method to identify and select a project that provides you rapid returns with respect to the initial investment. Even though this is one of the simplest economic methods you can use to select a project, it has its share of disadvantages, such as:

• It does not consider a possibility of additional investment at a later stage, which might be required in the project life span.
• It is more concerned about the payback period and not about the overall profitability of the project.
• It does not consider the time value money concept where revenue generated at a later stage is worth less than the revenue earned in the current time period.
• The denominator of the formula is based on average revenue from the project over multiple years. If the estimated revenue is generated at a later part of the project life cycle, the calculation incorrectly indicates an early payback period.

Internal rate of return is yet another economic model for project selection. Internal rate of return is defined as the rate of interest at which the revenue of the project and the cost of the project are equal. This value is also known as a break even value, where the present value of the future cash flow is equal to the initial investment. The rate of return is referred to as internal because of the fact that you do not consider environment factors, such as inflation, when calculating this rate of return.

To understand this model better, you can consider an investment you make. When making a investment, you always expect certain returns from the investment and select an investment option that offers the highest rate of return from the investment. Similarly, when the organization has multiple projects to invest in, you calculate the rate of return for all the projects and select the one with highest rate of return.

You use internal rate of return to measure and compare the profitability of the project with respect to the investment. Calculating the internal rate of return not only enables you to decide on investing in a project, but also compare the profitability of the projects and select a project that has a better profitability than others. You always select a project that has higher internal rate of return. If you have multiple projects that require similar investment, then calculating and comparing internal rate of return would help you to select the project among the candidate projects. Higher is the internal rate of return more profitable would the project.

Calculating the internal rate of return is quite complicated and you need expertise to calculate it. You can use the following formula to calculate the internal rate of return:

Here:

• NPV is the net present value.
• N is the total number of time periods.
• n is a positive integer.
• C is the cash flow. Cash flow is a positive value of it is a revenue and negative if it is an investment.
• r is the internal rate of return.

You can either use expertise to calculate the internal rate of return my using the preceding formula or use specialized software, such as Microsoft Excel, to calculate the internal rate of return.

Always remember that you can never have a negative value for internal rate of return. Additionally, the calculating the internal rate of return enables you to use it as a decision tool to select a project. However, the internal rate of return might not always be equal to the compounded rate of return on the investment you make in the project.

In the Present Value economic model for project selection, you calculate the present value of a future cash flow from the project. You do not deduct anything from the value you have calculated. However, when calculating a Net Present Value (NPV), you deduct the costs incurred on the project from the present value of the project.

When calculating the net present value of the project, you first calculate the present value of the project revenue as well as the project cost over many periods of time. After calculating the present value of the project revenue and the project cost, you deduct the present value of the project cost form the present value of the project revenue to get the net present value of the project. If the resultant net present value is positive, it would be fruitful to select the project. Else, it would result in a loss making proposition.

You calculate the cost incurred on a project over multiple time periods the same way as you do for the present value for the project revenue. The only difference is that while calculating present value for the revenue, the value is always lower than the actual value because you lose on the interest that you would have otherwise accrued. However, in case of present value of the cost, the effective cost is lesser because you have already earned an interest on the amount.

Consider the following example. In a project you have to invest an initial amount of $ 6,000 and another $ 3,000 each in the first and second years. The projects is expected to generate revenue of $ 500 in the second year, $ 1,000 in the third year, $ 5,000 in the fourth year, and $ 10,000 in fifth year. Now, calculate the net present value of the project and evaluate if it is worth considering going ahead with the project.

To calculate the net present value of the project, you must calculate the present value of the cost as well as revenue by using the present value formula and then add the respective values. In this example, consider the prevailing rate of interest as 10% per annum. You can use a table similar to the following to make the calculations:

Net Present Value = 10,788 – 11,206 = -418

Notice that the total revenue generated from the project is $ 16,500. As a project manager, you might not want to consider this project because the net present value of the project is negative (-418). You always consider a project that has a positive net present value.

You can calculate net present values for all projects under consideration and select the one with highest and positive net present value.

A bird in hand is worth two in the bush. This prose is true whenever you consider any investment, which encourages you to calculate time value money for an investment. Time value money is a concept that mentions that it is more important to receive an amount today that receiving the same amount a year down the line. For example, it is more valuable to receive $ 1000 today than receiving the $ 1000 a year or two down the line.

The present value of $ 1000 that you receive after a year is less than $ 1000. This is because the $ 1000 that you will receive includes the interest accrued over the year. Therefor, according to the time value money, the present value of this amount would be $ 1000 actually be $ 1000 – the interest amount. If you take 10% as the prevailing interest rate, the present value of this amount would be $ 1000 – $ 100, which amounts to $ 900. Therefore, notice that the calculation of the present value removes the interest part.

When calculating the present value, you compound the interest. The interest accrued for a time period is added to the principal amount before interest for the next time period is calculated.

Calculating the present value of the makes an important check when selecting a project. In this economic model, you evaluate the current value of the future cash flow of the project. To calculate the current value of the future cash flow, you can use the following formula:

PV = FV / (1 + r)ⁿ

In this formula:

• PV is the present value of the amount
• FV is the future value of the amount
• r is the rate of interest used to discount the future value of the amount
• n is the number of time periods after which the future value is received

For example, for a project that you expect to receive revenue of $ 500,000 after five years with prevailing interest rate as 10%, then you can calculate the present value of the amount as follows:

Here:

• PV is to be determined
• FV = $ 50,000
• r = 10% or 0.1
• n = 5

Therefore, in this case:

PV = 500,000 / (1 + 0.1)⁵

= 500,000 / 1.61

= 310,559

You can notice that the present value of the $ 500,000 revenue you will receive after five years is 310,559.

If you expect more than one future values form the project, as expected in a real life project, you can calculate the present value of all of these future values individually, and then add all the present values to get a single present value for the project.

You can calculate the present value of all the candidate projects and select the one that provides you the highest present value for the amount invested in the project.

One of the most important activities in project management is the selection of a project. As it seems, it is not simple activity. For an organization, it could be a make or a break situation. Whereas selecting a successful project that aligns to the business objectives can turnaround the organization, a casually selected project not aligned to the business objectives might create a havoc and even result in wastage of critical resources. Therefore, you must use utmost care when selecting a project that is a viable one instead of the one that might not produce desired results.

At any given moment, you might realize that there are multiple projects lined up that the organization could consider. One of the models that you can use to select a project is an Economic Model of project selection. An Economic Model of project selection enables you to ensure that the project is economically viable. Among the available choice of projects, you compare the economic viability of the projects and select the most viable project.

The Economic Model of project selection not only enables you to ensure that you select a project that has high chances of success, but also has good economic returns.

You can use the following economic models to when selecting a project:

• Present Value (PV): In this economic model, you evaluate the current value of the future cash flow of the project. To know more about this economic model, refer Economic Model for Project Selection – Present Value.
• Net Present Value (NPV): In this economic model, you calculate the net present value of a project by deducting cost incurred on the project over multiple periods of time from the present value of the project. If the NPV of a project is positive, it is a good idea to select the project. To know more about this economic model, refer Economic Model for Project Selection – Net Present Value.
• Internal Rate of Return (IRR): In this economic model, you calculate the rate of interest at which the cash inflow to the project is equal to the cash outflow from the project. The higher is the value of IRR more profitable is the project. To know more about this economic model, refer Economic Model for Project Selection – Internal Rate of Return.
• Payback Period: In this economic model, you calculate the time period required to recover the investment the organization has made in a project before the project starts returning profits. To know more about this economic model, refer Economic Model for Project Selection – Payback Period.
• Benefit cost Ratio: In this economic model, you calculate the ratio between the cost of the project and benefits form the project. The benefits include all forms of revenue you generate from the project and not just the profits. A benefit cost ratio greater than one indicates projects generates more benefits than the cost incurred. To know more about this economic model, refer Economic Model for Project Selection – Benefit-cost Ratio.