Overview of Project Selection Concepts / Methods / Techniques

Summary

This video provides a comprehensive overview of essential project selection methods and techniques for the PMP exam. It covers key concepts like Net Present Value (NPV), Payback Period, Return on Investment (ROI), Benefit-Cost Ratio (BCR), Opportunity Cost, and Internal Rate of Return (IRR), explaining how to assess and select the best project based on these financial metrics. The video emphasizes that higher values are better for NPV, ROI, BCR, and IRR, while a shorter Payback Period is preferred. This summary is crucial for PMP exam preparation and offers practical insights into making informed project management decisions.

Takeaways

• 😀 PMP exam often includes questions on project selection methods, which are essential to understand for passing the exam.
• 😀 Key project selection methods include Net Present Value (NPV), Payback Period, Return on Investment (ROI), Opportunity Cost, Benefit-Cost Ratio (BCR), and Internal Rate of Return (IRR).
• 😀 NPV: The higher the NPV, the better it is for the organization. An NPV greater than 0 indicates a profitable project, while less than 0 means a loss.
• 😀 Payback Period: Shorter is better. A shorter payback period means the project returns its initial investment faster.
• 😀 ROI: Higher ROI indicates better returns on investment. A higher ROI is more beneficial for the organization.
• 😀 Opportunity Cost: This refers to the highest value of the project that was not selected. There's no need for calculation, just selection based on value.
• 😀 BCR: A BCR greater than 1 is profitable, and the higher it is, the better. A value of 1 means break-even, and less than 1 means the project will lose money.
• 😀 IRR: The larger the IRR, the better. A higher IRR indicates higher profitability for the organization.
• 😀 It's important to understand these financial concepts, as project managers often need to discuss these with higher management in financial terms.
• 😀 For the PMP exam, these concepts can help project managers make decisions when presented with multiple projects. Remember: Higher is better for NPV, ROI, BCR, and IRR, while lower is better for Payback Period.

Q & A

What is the significance of project selection methods in the PMP exam?

Project selection methods are important in the PMP exam as they help you understand how to evaluate and choose between different projects based on financial metrics. At least one or two questions related to these methods can be expected in the exam.

What is Net Present Value (NPV) and how is it used in project selection?

Net Present Value (NPV) is a financial metric used to evaluate the profitability of a project. If NPV is greater than 0, the project is considered profitable. A higher NPV value indicates a better financial return for the organization.

What does the Payback Period represent and how is it assessed?

The Payback Period represents the time it takes for a project to recover its initial investment. A shorter Payback Period is preferable as it indicates that the project will return the invested capital quicker.

How is Return on Investment (ROI) evaluated in project selection?

Return on Investment (ROI) is evaluated by comparing the financial return to the cost of investment. The higher the ROI, the more beneficial the project is for the organization, as it generates a higher return relative to the investment.

What is Opportunity Cost, and how is it related to project selection?

Opportunity Cost refers to the value of the project that is not selected. While there are no specific calculations for Opportunity Cost, it is important to identify the highest value project that was not chosen.

What is the Benefit-Cost Ratio (BCR) and how should it be interpreted?

The Benefit-Cost Ratio (BCR) compares the benefits of a project to its costs. If BCR > 1, the project is considered profitable. A higher BCR is preferred, as it indicates a better return on investment for the organization.

How does Internal Rate of Return (IRR) affect project selection decisions?

The Internal Rate of Return (IRR) is the percentage return expected from a project. A higher IRR indicates that the project is more attractive and financially beneficial for the organization.

What are the general rules for evaluating financial metrics like NPV, ROI, and IRR?

For financial metrics like NPV, ROI, and IRR, higher values are better, as they indicate greater profitability and financial benefit. In contrast, for Payback Period, a shorter duration is preferred, as it indicates quicker recovery of the invested capital.

How can understanding project selection methods help in real-world project management?

Understanding project selection methods helps project managers make informed decisions about which projects to pursue, ensuring that the projects selected are financially viable and align with the organization’s goals.

What should be included in a 'brain dump' for the PMP exam, based on this video?

For the PMP exam, a 'brain dump' should include the key principles from project selection methods, such as remembering that higher NPV, ROI, BCR, and IRR are better, while a shorter Payback Period is preferred. This quick reference can help with decision-making during the exam.