Top 10 Project Selection Methods for Project Managers

When you have various challenging and captivating projects to select from, identifying a project that suits your team's potential, competency level, and has the best success rate is the initial step in effective project management.

Project selection methods provide a set of time-tested practices related to deep logical reasoning to select a project and strain undesirable projects with a low likelihood of success.

These methods are significant for practicing project professionals and enthusiasts preparing for the PMP credential test. Therefore, this blog will see the top 10 project selection methods in detail.

What are the Project Selection Methods?

Imagine that a company you're working for has been given numerous project contracts. However, due to resource restrictions, the company cannot tackle all the projects at a time; hence they decide on the projects that maximize profitability.

This is where the project selection technique comes into action. There're two categories for this method:

• Constrained Optimization Methods
• Benefit Measurement Methods

Though time-consuming, employing these techniques is crucial for an effective business plan. There are different documented techniques for project selection; however, the basic thumb rule - for small projects (not complex), the benefits measurement model is beneficial; whereas for large ones, the constrained optimization method is better.

10 Best Project Selection Methods

1. Benefit Measurement Methods

This technique is based on the present value of estimated cash inflow and outflow. Cost benefits are calculated and compared to other projects to make a decision. The methods leveraged in Benefit Measurement are:

• Payback Period
• Scoring Model
• Opportunity Cost
• Economic Model
• Internal Rate of Return
• Discounted Cash Flow
• Benefit/Cost Ratio
• Net Present Value

2. Payback Period

The Payback Period is a primary project selection method, where the ratio of the total cash to the average per Period cash is calculated. Then, it's time significant to recover the expense invested in the project. 

How is the Payback period calculated?

Payback Period = Cost of the project / Avg annual cash inflows

When the Payback Period is leveraged as the project selection method, the project with the shortest Period is preferred as the company rapidly regains the original investment. 

However, there are a few restrictions to this approach:

• Doesn't consider the time value of money.
• Benefits accrued after the Period are not considered. It focuses more on liquidity while profitability is neglected.
• Risks involved in individual projects are ignored.

3. Scoring Model

This is an objective technique where the project selection committee lists relevant requirements, weighs them according to their relevance and priorities, then adds the weighted values. Once the scoring of the projects is completed, the project with the top score is selected.

4. Opportunity Cost

It is the cost that is given up when choosing another project. Therefore, the project with a lower opportunity cost is selected during the selection process.

5. Economic Model

Also known as Economic Value Added (EVA) is the performance metric that estimates the worth-creation of a company while defining the capital return. It's also described as the net profit after deducting taxes and capital expenditure.

If several projects are assigned to a project professional, the project with the highest EVA is chosen. It is expressed in numerical terms and not as a percentage.

6. Internal Rate of Return (IRR)

It's the interest rate at which the Net Present Value (NPV) is zero, i.e., when the present outflow value equals the current inflow value. The IRR is the annualized effective compounded return rate or the discount rate, where the NPV of all cash flows from a specific investment equals zero.

It is leveraged to choose the project with the best profitability; when selecting a project, the one with a higher IRR is selected.

When leveraging the IRR as the project selection requirement, companies should remember not to use this solely to judge a project's worth. For example, a project with a lower IRR might have a higher NPV, and, assuming there's no capital restriction, the project with the higher NPV should be chosen as this maximizes the shareholder's profit.

7. Discounted Cash Flow

It's a known fact that the future value of money won't be the same as today. For instance, $20K won't have the same worth a decade from now. Hence, during cost investment and ROI estimations, ensure that you consider the discounted cash flow concept.

8. Benefit/Cost Ratio

The benefit/cost ratio is the ratio between the present value of inflow or the cost invested in a project to the current value of outflow, which is the return value from the project. Projects with a higher benefit-cost ratio or lower cost-benefit ratio are generally selected over others.

9. Net Present Value (NPV)

NPV is the difference between the project's current cash inflow and cash outflow values. It must always be positive. When selecting a project, one with a higher NPV is preferred. The merit of considering the NPV over the Payback Period is that it considers the price's future value. 

However, there're restrictions on the NPV:

• There isn't any generally accepted method of deriving the discount value used for the present value estimation.
• The NPV doesn't offer any picture of the profit or loss that the company can make by embarking on a particular project.

10. Constrained Optimization Methods

It's also known as the Mathematical Model of Project Selection, leveraged for massive projects requiring comprehensive and complex mathematical calculations. The methods leveraged in constrained optimization methods are:

• Linear programming
• Multiple objective programming
• Non-linear programming
• Dynamic programming
• Inter programming

However, these topics aren't discussed in detail in the PMP accreditation. Therefore, for the credential test, all that is necessary to know is the list of mathematical model techniques that are leveraged in project selection.