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  • Essay / Project Selection Methods - 1131

    Choosing a project that should be undertaken by an organization is a daunting task and is probably the biggest decision the organization has to make. Many factors must be considered before an organization can decide which proposal should be taken up as a project and which should be abandoned. The organization must choose the most practical proposal, which must be consistent with the future objectives and future requirements of the organization. Since the organization has to decide which project would be viable and which project is worth approval, different project selection methods come into play. It is very important to choose the appropriate project selection method. This choice ultimately decides which project should be taken up by the organization. Therefore, organizations need to be very careful in terms of selecting projects because even a small mistake could prove disastrous for the project as a whole and could harm the organization also in the long run.Selection MethodsDifferent Methods Project selection tools are used by different organizations based on management decision and suitability for their particular business sector. All these methods have different functionality and characteristics. Therefore, each selection method is suitable for different organizations. Although these project selection methods may be different, the basic principles and concepts remain the same. In the following image we can see two such methods: profit measurement and payback period method (constrained optimization). method)Benefit measurement methods are used when different projects need to be compared to each other. This can include different styles of comparison, some of which are discussed in the middle of the document......in most cases. We can therefore say that it is enough to choose either the net present value method or the internal rate of return method. It is also called the economic rate of return (ERR) method. Advantages and disadvantages of TRI1. Perfect use of time value of money theory2. All cash flows are equally important3. Uniform classification4. Maximum shareholder profitability5. No need to calculate the cost of capital. Disadvantages of internal rate of return1. Understanding IRR is difficult2. Not useful for comparing two mutually exclusive investments. Implementation of the chosen method: The methods mentioned above can be used in different combinations in each organization. There may be other factors that also need to be considered apart from the methods discussed above, which is why the choice of project should be made very carefully..