Project Selection

🎯 Project Selection Methods: Picking the Golden Egg

Imagine you’re a treasure hunter. You have a map with 5 different treasure chests. But you only have time and energy to dig up ONE. How do you decide which chest has the BEST treasure? That’s exactly what Project Selection is all about!

🌟 The Big Picture: Why Project Selection Matters

Think of a company like a family deciding how to spend their savings. They could:

• Fix the roof 🏠
• Buy a new car 🚗
• Take a vacation ✈️
• Save for college 🎓

They can’t do everything! They need to pick the best option that gives them the most value for their money.

Project Selection = Choosing the RIGHT project to invest in.

🧮 The 5 Magic Tools for Picking Projects

Let’s meet our 5 superhero tools. Each one helps us answer a different question:

📊 1. Benefit Cost Ratio (BCR)

The Lemonade Stand Story

Little Mia wants to open a lemonade stand.

Her Plan:

• Spend $10 on lemons, sugar, and cups
• Sell lemonade and earn $30

The BCR Calculation:

BCR = Benefits ÷ Costs
BCR = $30 ÷ $10
BCR = 3.0

What Does This Mean?

Mia’s BCR of 3.0 means: For every $1 she spends, she gets $3 back. That’s a great deal!

🎯 Golden Rule

Higher BCR = Better Project

If Project A has BCR of 2.5 and Project B has BCR of 1.8, pick Project A!

💰 2. Net Present Value (NPV)

The Time Travel Money Story

Here’s a mind-bending truth: $100 today is worth MORE than $100 next year.

Why? Because if you have $100 today, you can put it in the bank and earn interest!

The Ice Cream Shop Example

Tom wants to open an ice cream shop.

His Numbers:

• Initial Cost: $1,000 today
• Earnings Year 1: $500
• Earnings Year 2: $600
• Earnings Year 3: $400
• Discount Rate: 10% (what the bank would pay)

The Magic Formula:

NPV = (Future Money ÷ Growth Factor)
      - Initial Investment

Where Growth Factor = (1 + rate)^years

Calculation:

Year 1: $500 ÷ 1.10 = $454.55
Year 2: $600 ÷ 1.21 = $495.87
Year 3: $400 ÷ 1.33 = $300.75

Total Present Value = $1,251.17
NPV = $1,251.17 - $1,000 = $251.17

What Does This Mean?

Tom’s NPV of $251.17 means: Even after accounting for time value, he’ll truly profit $251.17. Green light!

📈 3. Internal Rate of Return (IRR)

The Magic Growth Rate Story

Think of IRR like asking: “If my money were in a savings account, what interest rate would give me the same result?”

The Cookie Business Example

Sara starts a cookie business:

• Invests: $1,000 today
• Gets back: $1,200 after 1 year

What’s her IRR?

$1,000 × (1 + IRR) = $1,200
IRR = 20%

It’s like her money grew at a 20% interest rate!

The Decision Rule

graph TD
    A["Calculate IRR"] --> B{Compare to<br/>Hurdle Rate}
    B -->|IRR > Hurdle| C["✅ Accept Project"]
    B -->|IRR < Hurdle| D["❌ Reject Project"]

Hurdle Rate = The minimum return the company wants (usually 10-15%)

Example Decision

• Sara’s Cookie Business: IRR = 20%
• Company’s Hurdle Rate: 15%
• Decision: 20% > 15%, so Accept! 🎉

⏰ 4. Payback Period

The Piggy Bank Story

You buy a piggy bank for $20. Every week, you drop $5 into it (your savings).

How many weeks until you “get back” your $20?

Payback Period = Initial Cost ÷ Annual Savings
Payback Period = $20 ÷ $5 per week
Payback Period = 4 weeks

The Vending Machine Example

Mike buys a vending machine:

• Cost: $3,000
• Monthly Profit: $250

Payback Period:

$3,000 ÷ $250 = 12 months (1 year)

What’s Good?

⚠️ Important Limitation

Payback Period is simple but has a flaw:

It ignores what happens AFTER payback!

Both have 2-year payback, but Project B earns $5,000 extra in Year 3!

🎯 5. Return on Investment (ROI)

The Birthday Money Story

You got $100 for your birthday. You used it to buy supplies and made friendship bracelets. You sold them all for $150.

What’s your ROI?

ROI = (Gain - Cost) ÷ Cost × 100%
ROI = ($150 - $100) ÷ $100 × 100%
ROI = 50%

You made a 50% return! 🎉

The App Development Example

A company builds an app:

• Development Cost: $50,000
• Revenue Generated: $75,000

ROI = ($75,000 - $50,000) ÷ $50,000 × 100%
ROI = $25,000 ÷ $50,000 × 100%
ROI = 50%

What’s a Good ROI?

Higher ROI = Better Project!

🔄 Putting It All Together

The Ultimate Comparison

Let’s compare two projects using ALL 5 methods:

Result: Project Beta wins 4 out of 5 metrics. Choose Beta!

🧠 Quick Decision Flowchart

graph TD
    A["New Project Proposal"] --> B["Calculate BCR"]
    B --> C{BCR > 1?}
    C -->|No| D["❌ REJECT"]
    C -->|Yes| E["Calculate NPV"]
    E --> F{NPV > 0?}
    F -->|No| D
    F -->|Yes| G["Calculate IRR"]
    G --> H{IRR > Hurdle?}
    H -->|No| D
    H -->|Yes| I["Check Payback"]
    I --> J{Acceptable?}
    J -->|No| D
    J -->|Yes| K["✅ APPROVE"]

🌟 Remember This Forever

💡 The Golden Wisdom

“Smart project managers don’t pick projects based on gut feeling. They use NUMBERS to make decisions. These 5 tools are your compass, guiding you to the treasure chest that holds the most gold!”

You’re now ready to select projects like a PRO! 🚀