Project Selection & Justification

Various methods are employed to select projects based on strategic alignment, resource availability, and potential return. This section outlines common approaches and key financial models used in the decision-making process.

Approaches to Project Selection
  • Checklist Models: Simple models using a list of criteria to evaluate potential projects.
  • Weighted Scoring Models: Assign weights to criteria based on importance, allowing for a more nuanced comparison.
  • Analytic Hierarchy Process (AHP): A structured technique for organizing and analyzing complex decisions, using pairwise comparisons.
  • Profile Models: Categorize projects based on risk, return, and other dimensions to visualize and compare options.
  • Financial Models: Evaluate projects based on their expected financial performance using metrics like Payback Period, NPV, and IRR.
Key Financial Formulas
Payback Period:
Payback Period=Initial InvestmentAnnual Cash Savings\text{Payback Period} = \frac{\text{Initial Investment}}{\text{Annual Cash Savings}}
Net Present Value (NPV):
NPV=∑Ft(1+r+p)t−I\text{NPV} = \sum \frac{F_t}{(1 + r + p)^t} - I
Internal Rate of Return (IRR):
IO=∑ACFt(1+IRR)tIO = \sum \frac{ACF_t}{(1 + IRR)^t}