## Project selection methods

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

- Benefit measurement method
- Murder board
- Scoring model
- Peer review
- Economic model

- 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

**Economic value added (EVA)**:

It represent how much value a project has truly created for its stakeholders. In other words we can say whether project returns to the company more value than its cost.