I found an 8-country survey which may ad to this interesting exchange: what
methods do managers employ for selecting projects? Financial Theory advises
us to employ Net Present Value (NPV) as the soundest criteria for project
prioritization, however, much to my surprise survey responses are quite
different:
The payback method is the most widely used among companies in all countries:
USA 59%, Japan 52%, Ireland 84%, UK 76%
Net Present value is employed by 28% in the USA, 6% in Japan, 45% in
Australia, 60% in South Korea
Internal Rate of Return is employed by 52% in USA, 37% in Australia, 4% in
Japan, 39% in UK.
Full survey results can be found in Horngren Charles et al. "Cost
Accounting-A Managerial Emphasis", 1999, Prentice Hall pp. 761,
-----------------------
Armando Gallegos Monteagudo, Ph.D.
GERENS Escuela de Gesti�n y Econom�a
Av. Velasco Astete 1491, Surco
Lima 33, PERU
agallegos@gerens.org
Tlf: (511) 275-3271, (511) 275-4822
Fax: (511) 275-4824
URL:
www.gerens.org
----- Original Message -----
From: Charles Wankel <
cxx@bellatlantic.net>
To: <
MG-ED-DV@MAELSTROM.STJOHNS.EDU>
Sent: Saturday, October 13, 2001 5:49 PM
Subject: Selecting projects
> From: Michael Cook [mailto:
michaelscook@hotmail.com]
>
> Jay Warner asked for some information on project selection processes,
> and
> Fred Nickols added some cogent comments. Fred pointed some of the
> difficulties with cost/benefit and ROI analyses: bogus numbers that
> reflect
> the biases of whomever is defending/attacking the proposed project. To
> round out these rational, economic-based methods, payback (how soon will
> we
> recoup the development costs and begin to make a profit) is another
> analytic
> tool. Presumably, when faced with a choice, you select the project with
> the
> earliest payback. But, what if the alternatives have a higher overall
> ROI,
> or a better cost/benefit ratio? And, of course, payback suffers from
> the
> same problem of bogus numbers as does ROE and cost/benefit.
>
> I have also seen discussion of the MiniMax theory (minimize the maximum
> loss--never take on a project, that if unsuccessful, would result in
> bankruptcy).
>
> Having worked at consulting firms for over 15 years in which proposal
> decisions--which projects to bid, and at what price--were a weekly, or
> even
> daily decision, a successful selection process is more of a decision
> tree
> than anything else.
>
> First, do we have the capability of performing the project--do we have
> the
> people, material, $, etc. to be successful *given what we are already
> doing,
> AND our likelihood of winning other work we've already bid on/selected*?
> If
> we don't have the resources could we get them by the time we would have
> to
> start?
>
> Second, can we perform the project without destroying the company, or
> the
> staff morale? For example, we might win a project that would require
> everyone to travel all of the time, but would they do that, or would
> they
> quit?
>
> Third, can we make a profit? If so, is it more profit than something
> else
> we might do? This is the only really rational economic step, and, of
> course
> it can suffer from the bogus numbers problem. But generally, profit is
> pretty simple--will we make money?
>
> Fourth, is there some other benefit that distinguishes this project from
>
> others, such as market entry, market share, standing in the community,
> or
> large potential future profits? For some firms, "fun" or professional
> interest might also be included here.
>
> Finally, is there some special negative/cost that distinguishes this
> project? For example, could it make current clients/customers unhappy
> or
> could it result in conflict with external groups ("Hey kids, lets open a
>
> hazardous waste landfill in _______")?
>
> And after all that, you go with the one that the senior vice president
> wanted to do all along....
>
> Michael S. Cook, Ph.D., PMP
> Colleague Consulting
> 8318 Gentle Brook Court
> Laurel, Maryland, USA 20723
> 301-498-6719
> Technical and management training and performance improvement