As the name suggests, the payback period takes into consideration the payback period of an investment. The Payback Period is a basic project selection method. It is the time necessary to recover the cost invested in the project. Payback Period is the ratio of the total cash to the average per period cash. Once the scoring of these projects is completed, the project with the highest score is chosen. The scoring model in project management is an objective technique: the project selection committee lists relevant criteria, weighs them according to their importance and their priorities, then adds the weighted values. The EVA is always expressed in numerical terms and not as a percentage. If there are several projects assigned to a project manager, the project that has the highest Economic Value Added is picked. It is also defined as the net profit after the deduction of taxes and capital expenditure. Economic ModelĮVA, or Economic Value Added, is the performance metric that calculates the worth-creation of the organization while defining the return on capital.
Projects that have a higher Benefit-Cost Ratio or lower Cost-Benefit Ratio are generally chosen over others. The techniques that are used in Benefit Measurement are as follows:Ĭost/Benefit Ratio, as the name suggests, is the ratio between the Present Value of Inflow or the cost invested in a project to the Present Value of Outflow, which is the value of return from the project. Cost benefits are calculated and then compared to other projects to make a decision. Benefit Measurement Methodsīenefit Measurement is a project selection technique based on the present value of estimated cash outflow and inflow. Let’s take a look at both these methods in further detail. There are a variety of documented methods for selecting a project, but the basic thumb rule is: for small projects that aren’t very complex, the Benefit Measurement Model is useful, whereas if it’s a large, complex project, the Constrained Optimization Method is a better fit. There are two categories of project selection methods:Īlthough time-consuming, employing these methods is essential for an effective business plan. This is where project selection methods come into play. Due to resource constraints, the organization can’t handle all the projects at once, so they need to decide which project(s) will maximize profitability. Consider this scenario: the organization you are working for has been handed a number of project contracts.
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