# Project selection methods

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## Project selection methods

There are various project selection methods. They are divided in two categories

1. Benefit measurement method
• Murder board
• Scoring model
• Peer review
• Economic model
2. Constrained optimization method (Mathematical )
• Linear programming
• Dynamic programming
• Integer programming
• Multi-objective programming

Let’s have some introduction of  different project selection methods.

Benefit cost ration (BCR):

It is a ratio of benefit over cost. If the Value of benefit cost ration (BCR) is grater then 1 (one) it is good.

Example 1: If project one is having BCR ratio of 1.9 and project two is having BCR ration of 2.2.Which project you will you choose?

Solution:

Project two as it has a greater BCR Value than project one.

Example 2:

If you expect cost of project is \$90,000 and you expect to gain \$1,80,000 from complete project. Calculate BCR for that.

Solution:

Benefit cost ratio (BCR): benefit over cost= benefit/cost

Here benefit is \$1,80,000 and cost is \$90,000

So BCR= 180000/90000=2

Internal rate of return (IRR) :

It means project’s return as an interest rate. Bigger internal rate of return (IRR) is always better.

Example: You have two projects, Project one has IRR of 10% and project two has IRR or 20%. Which one will you choose?

Solutions:

Project two as it has bigger IRR(20%) than project one (10%).

Present value (PV) & Net Present value (NPV) :

present value means current value today of future cash flow. You can calculate with the help of

PV=FV/ (1+r) n

Here

PV= Present value

FV= future value

R= rate of return

N=number of time period.

Bigger PV or NPV is better.

Example: You have two projects. Project one has NPV of \$90,000 and project two has NPV of \$60,000. Which one you are going to choose from those?

Solution:

Project one as it has greater NPV.

Opportunity cost:

It means selecting one project over another by giving up opportunity. Smaller opportunity cost is better for project selection.

Example:

If you have two projects project one has NPV of \$38000 and project two has NPV of \$90000.What is opportunity cost for selecting project two.

Solution: \$38000 is opportunity cost.

Payback period:

It measure time that how long it will take to get an investment back from project.

Example: You have two projects project one have payback period of 3 months and project two has payback period of 6 months. Which one you choose?

Solution: It is project one as it has less payback period.

Return on investment (ROI):

It shows how much percentage you make by investing in project. Bigger ROI is always better.

Returned on individual capital (ROIC):

It shows how money is used in invested project. We display this as a percentage.

ROIC= Net income/total investment