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.
