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Project selection methods

Project selection methods can be categorized into two main systems: benefit measurement methods and constrained optimization methods (Monnappa, 2020).

Benefit Measurement Methods:

These methods are preferable for smaller, simpler projects. They focus on evaluating the financial inflows and outflows of a project and include the following approaches:

  • Benefit/Cost Ratio: Projects with a higher ratio of return to cost are preferred.

  • Economic Value Added (EVA): The project with the highest net profit after taxes and expenses is selected.

  • Scoring Model: A committee assesses and scores the project based on relevant criteria, selecting the highest-scoring project.

  • Payback Period: The project with the shortest time to repay its cost is chosen, although this method has limitations, such as not accounting for risks or post-payback benefits.

  • Net Present Value (NPV): The difference between cash inflows and outflows; projects with higher NPV are preferred.

  • Discounted Cash Flow: Takes into account the decreasing purchasing power of money over time.

  • Internal Rate of Return (IRR): Projects with higher profitability (IRR) are selected, but IRR should not be used alone.

  • Opportunity Cost: The project with the lowest opportunity cost is selected.

Constrained Optimization Methods:

These are suited for more complex, long-term projects. They include:

  • Linear Programming: Optimizes resources to minimize costs.

  • Non-linear Programming: Used when project variables change at non-constant rates.

  • Integer Programming: Best for scheduling projects with both continuous and discrete activities.

  • Dynamic Programming: Breaks a project into smaller sub-problems and selects the project with the most beneficial solutions to these.

  • Multiple Objective Programming: Considers multiple objectives simultaneously to avoid sacrificing one goal for another.

For large and complex projects, experts or software may be required to properly apply these models.