Question

In Project Selection models :

Define and explain each :

1 - Financial(NPV,Payback period)

2 - Non-financial(weight score matrix)

Answer 1

Answer-) 1-) Financial

NPV METHOD

Net Present Value method: In this method, one estimates the revenue and costs involved in a project , during a period of time and then you subtract or discount certain adjustments such as inflation, risks etc to ascertain a net present value. If the net present value is positive that means the revenue will be more than costs , the company can take up the project and if the net present value is negative, then the company should decline the project. Npv = Cashflows/(1+r)i.

Where i is initial investment

r is discount rate

T = time period.

PAYBACK

Under payback method , it is seen that how money will be required to start a project and then after the business is running, how much will it generate and then the company has a time limit in which they see if the project reaches break even or not. Suppose a company has a time limit of 4 years, so if the project achieves break even in 4 years, they will take up the project and if the break even is beyond 4 years , they will leave the project. Just one drawback this method has that many cashflows comes after the time limit which may not go into consideration.

Payback = Amount of investment/ Annual cash flow.

2-) Non- Financial

WEIGHTED SCORE MATRIX

A weighted score matrix is essentially a administrative tool that assess potential choices against weighted factors. It means that every project is divided into several units such as risk, hardwork, time , revenue, costs etc. And then basis on a rating scale they are weighted. For example 5 being the maximum (good) and 1 being minimum (bad), they are prioritized according to the perceptions of project manager.

THANK YOU.