Project selection methods

Project selection is the process of evaluating proposed projects and choosing those that best meet organisational goals, since resources are limited. Methods are classified as follows.

1. Benefit measurement (comparative) methods

• Scoring models: weighted criteria (strategic fit, ROI, risk, resource availability). Each project receives a weighted score; the highest is selected.
• Comparative approach / Q-sort: projects are compared and ranked.
• Benefit-cost ratio (BCR): PV of benefits ÷ PV of costs; accept if > 1.

2. Financial (economic) methods

These are also benefit measurement methods, based on cash flows.

• Payback period: time to recover the investment. Shorter is better.
• Net Present Value (NPV): sum of discounted benefits minus costs; accept if NPV > 0. $NPV = \sum_{t} \dfrac{CF_t}{(1 + r)^t} - \text{Initial investment}$
• Return on Investment (ROI): (Benefits − Costs) ÷ Costs.
• Internal Rate of Return (IRR): discount rate at which NPV = 0; accept if IRR > required rate.
• Discounted payback.

3. Mathematical (constrained optimisation) methods

Linear programming, integer programming, dynamic programming and goal programming, used for large portfolios with resource constraints.

4. Non-numeric methods

• Sacred cow (project suggested by a senior official).
• Operating necessity (to keep the business running).
• Competitive necessity.
• Product line extension.
• Comparative benefit (committee judgment).

Selection tips

Use several methods together; include strategic fit and risk, not just finance.

Example: Project A has NPV Rs 5 lakh and payback 2 years; project B has NPV Rs 2 lakh and payback 4 years. A is preferred.