Project Selection Methods

The choice of a project that should be undertaken by an organisation is a daunting task and is probably the biggest decision that the organisation has to take. There are many factors that need to be taken care of before an organisation can decide which proposal should be taken up as a project and which are to be scrapped.

The organisation needs to choose the most practical proposal, which has to be in line with the organisation’s future goals and future requirements. Since the organisation needs to decide which project would be viable and which project is worth approval hence the different project selection methods come into use.

It is very important to choose the proper method for project selection. This choice ultimately decides which project should be taken up by the organisation.

Hence the organisations need to be very careful in terms of project selection, as even a small mistake could prove disastrous to the project as a whole and may damage the organisation also in the long run.

Selection Methods

Different project selection methods are used by different organisations as per the management decision an suitability to their particular line of business. All these methods have different features and different characteristics. Therefore every selection method is good for different organisations.

Even though these project selection methods may be different but the basic principles and concepts remain the same.

In the next picture we can see two of such methods: Benefit measurement and Payback period method (constrained optimisation method)

The benefit measurement methods are used where various projects are to be compared against each other. This may include different styles of comparison, some of which are discussed in th...

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...n most of the cases. Hence we can say that it is sufficient to choose either the Net Present Value Method or the internal rate of Return Method.

It is also referred to as Economic rate of Return Method (ERR).

Advantages and Disadvantages of IRR

1. Perfect Use of Time Value of Money Theory

2. All Cash Flows are Equally Important

3. Uniform Ranking

4. Maximum profitability of Shareholder

5. Not Need to Calculate Cost of Capital

Disadvantages of Internal Rate of Return

1. To understand IRR is difficult

2. Not Helpful for comparing two mutually exclusive investments.

Implementation of the Chosen Method:

The above mentioned methods can be used in different combinations in every organisation. There may be other factors also which need to be taken into account apart from the methods discussed above hence the project choice should be done very carefully.