NUMERIC PROJECT SELECTION MODEL
DISCOUNTED CASH FLOW
This method or procedure is also called the net present value procedure. The net current value associated with all cash flows is estimated by discounting them through the required rate return rate in this method.
Where k = the return rate
Ft = flow of cash for the period t
Ao = initial investment of money.
Net cash flow, in most cases, can be detrimental in the initial stages of the project because of the possible outflow in the form of initial investments. Nevertheless, cash flow is likely to become positive in an event a project acquires success. If the total amount of the net present value relating to the net profit value of all the forecasted cash flow in the entire lifetime of the project is positive, the project becomes acceptable (Shin et al., 2012). For example, in case a project has an initial investment of $100000. The project has a net cash flow of approximately $25000 per year for eight years. The rate of return required relating to the project is 15% and an inflation rate of 3% per year.
The net present value relating to the project becomes positive since the current value of the inflows is higher than the current value of the outflow.
NON-NUMERIC PROJECT SELECTION MODEL
COMPARATIVE BENEFIT MODEL
As far as this selection model is concerned, there are many projects which need to be considered by companies. The subsets relating to the projects are chosen by the senior management of the company and can provide profound benefits to the company. Nevertheless, comparing many projects is not so easy. For instance, some projects have got a relationship with the current products; at the same time, some are related to the computerization of specific records, others have got a connection to altering the production method, and many of them may have such areas which cannot be easily classified. According to Padhy and Sahu (2011), There does not exist any formal way which is used in the selection of projects in the companies. Still, it is through the view of the members of the selection committee on the projects which are likely to benefit the company as compared to the others even if they don’t possess the suitable way of specifying or measuring the proposed benefit.
For all kinds of projects, if not a formal model, this concept or type of non-numeric project selection model is usually used in the cases of the selection decision. The United States organizations are considering various social programs for giving funds to them to utilize this concept in the decision making process. (Dutra et al., 2014)Every recognized project which has a positive recommendation is elaborated by the senior management of the funding company to make efforts in developing a portfolio that can effectively suites the objectives as well as budgets of the organization.
While other methods like relative valuation are somewhat more natural to calculate, their reliability becomes questionable when the entire sector or market is over-valued or under-valued. Discounted Cashflow cuts across through this difficulty and predicts the best possible intrinsic value. On the other hand, the comparative benefit model has two main advantages, that is: it is easy to calculate as well as easy to understand (Padhy and Sahu, 2011).