The first step in project management is deciding what projects to undertake. Therefore, project initiation starts with identifying potential projects, using realistic methods to select which projects to work on, and then formalising their initiation by issuing a project charter.

In addition to using SWOT analysis organisations often follow a detailed process for project selection. Organisations identify many potential projects as part of their strategic planning processes, and they often rely on experienced project managers to help them make project selection decisions. However, organisations need to narrow down the list of potential projects to those projects that will be of most benefit. Selecting projects is not an exact science, but it is a necessary part of project management. Many methods exist for selecting from among possible projects. Five common techniques include:

Focussing on broad organisational needs

Categorising information technology projects

Performing financial analysis

Using a weighted scoring model

Implementing a balanced scorecard

In practice organisations usually use a combination of these approaches to select projects. Each approach has its advantages and disadvantages, and it is up to management to decide the best approach for selecting projects based on their particular organisation.

You are a member of a priority team in charge of evaluating and selecting small information technology project proposals. Management in your organisation have deemed a combination of focussing on broad organisational needs, performing financial analysis and using a weighted scorecard as appropriate tools to evaluate and rank potential projects. Your organisation has set a discount rate of 9% and a minimum return on investment of 30%.

Financial Analysis:

PROJECT 1
Discount rate:	0.09
YEAR	0	1	2	3	4	TOTAL
	$	$	$	$	$	$
Inflows		120,000	180,000	155,000	160,000	615,000
Outflows	280,000	30,000	30,000	30,000	30,000	400,000
Cumulative Net Flow	(280,000)	(190,000)	(40,000)	85,000	215,000	215,000
Discount Factor	1.0000	0.9174	0.8417	0.7722	0.7084
Discounted Inflows	0	110,092	151,502	119,688	113,348	494,631
Discounted Outflows	280,000	27,523	25,250	23,166	21,253	377,192
Cumulative Discounted Net Flows	(280,000)	(197,431)	(71,179)	25,344	92,095	117,439
ROI	31%
NPV	117,439
Payback		years
PROJECT 2
YEAR	0	1	2	3	4	TOTAL
	$	$	$	$	$	$
Inflows	110,000	110,000	110,000	110,000	110,000	550,000
Outflows	280,000	40,000	20,000	15,000	10,000	365,000
Cumulative Net Flow	(170,000)	(190,000)	(40,000)	85,000	215,000	185,000
Discount Factor	1.0000	0.9174	0.8417	0.7722	0.7084
Discounted Inflows	110,000	100,917	92,585	84,940	77,927	466,369
Discounted Outflows	280,000	36,697	16,834	11,583	7,084	352,198
Cumulative Discounted Net Flows	(170,000)	64,220	75,751	73,357	70,843	114,171
ROI	32%
NPV	114,171
Payback		years

Weighted Score:
Criteria	Weight	PROJECT 1	PROJECT 2
Supports explicit business objectives	25%	90	90
Has strong internal sponsor	15%	70	80
Has strong customer support	15%	50	70
Uses realistic level of technology	10%	25	30
Can be implemented in one year or less	5%	20	20
Provides positive NPV	20%	60	60
Low risk in meeting scope, time and cost goals	10%	30	40
Weighted Project Scores	100%

Question C1

a). Explain what is indicated by the NPV figure in each of the above projects. b). Explain what is indicated by the ROI figure in each of the above projects.

c). Using the appropriate formula calculate the payback period for each project. Which project has the earliest payback period?

a). Calculate the weighted scores in the above projects.

b). Based on your analysis of the information (NPV, ROI, payback period and weighted scores) which project you would recommend your organisation to invest in? Justify the reasons for your choice.