Project Selection - Qualitative Factors free essay sample

Introduction: The selection of a project or a portfolio of projects constitutes one of the main problems that managers are faced with. Decision of selecting an engineering, construction or RD project is often fundamental for business survival. Such decisions usually involve prediction of future outcomes considering different alternatives. These predictions are not known with certainty, which results in a high level of uncertainty in managerial decision-making. So project managers often have to face some degree of uncertainty caused mainly by the increasing volatility in interest and exchange rates, lifting trade barriers and development of new technologies in electronics, nanotechnology, biotechnology, etc†¦ Various objectives are usually considered when projects are evaluated, including economic desirability, technical, environmental, social and/or political factors. As the decision maker tries to maximize or minimize outcomes associated with each objective depending on its nature, the evaluation criteria could be of various natures. While financial measures (Net Present Value and Internal Rate of Return) are of quantitative type, the ones that reflect technical, environmental or social objectives are usually of qualitative nature. We will write a custom essay sample on Project Selection Qualitative Factors or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page (Maciej Nowak, 2006) In this document we will first identify and explain the non-financial factors an organisation must consider as part of any project economic evaluation. After that, we will evaluate the financial (quantitative) and non-financial (qualitative) models and techniques available to appraise investment projects. Qualitative Factors Whenever a project is to be evaluated, it is important to identify and understand the market demand whether it is static or fluctuating taking into account competition and its possible effects on the project’s market shares. Comparing the company’s performance and processes with those of its competitors and other best practice companies before taking a decision on a project is vital, hence scores and weightings of the company’s product, services or processes are to be compared with best practice in the same industry to identify areas of improvement. (Arun Kanda, 2011) Increasing assets and capital is not the main objective of many projects, it is also creating and enhancing human and institutional capabilities to manage and maintain development activities. Institutional appraisal is about the adequacy of such human capability and the institutional framework in which projects are implemented. This is one of the most challenging aspects of the project’s overall success. Many projects have limitations at the human and institutional level even if they have the most perfect design. Therefore, careful and sensitive consideration of institutional dimension and local conditions is required in project appraisal. (SOAS, University of London – 2012) After establishing the demand and saleability of the product, the appraiser should determine the technical feasibility of the project. The right decision is to be made taking into consideration Issues related to physical scale, layout, location of facilities, technology used, processes, and adaptation without forgetting Local-specific requirements, technical capacity, maintenance and Life expectancy, cost estimates and their relation to engineering or other data on which they are based. This is to evaluate whether the project is viable from a technical point of view or not. For instance, in the technical appraisal of an educational project considerations will have to be given to the curriculum, the number and nature of educational establishments, their physical facilities (classroom, space, laboratories, libraries, and equipment), personnel, skills gaps and training requirements, etc. (K. Nagarajan, 2004) A project may be located in an industrial area to take advantage of various concessions given by the government and other agencies, but it is required to weigh various locational factors needed for the optimum functioning of the unit. Some of the factors may not be present, particularly those relating to external economies, if the location of the unit is in a backward area. In such a case, the loss of external economies has to be compensated by the concessions available from the government and other agencies. (Hrishikes Bhattacharya, 2011) The following location related factors should be taken into account when appraising a project: Transportation of both raw materials and finished products. Topography of the area. Energy requirements (electricity and natural gas) Alternative power generation arrangements. Requirement and availability of workers (skilled and unskilled) Water requirement versus availability. Proximity to residential areas. State laws and regulations. Local taxes. Future expansion plans and availability of adjoining land. The world is concerned about the environment, depletion of the ozone layer, quality of air, water noise pollution and other emissions. The Environmental impact could be visible immediately but in most cases it takes time to appear hence the requirement to consider long term effects, analyse the impact and put in place mitigation measures. Prevention, compliance with international standards as well as looking at using least-polluting technology are to be considered as well. Every organization has its own risk tolerance, where some risk factors might be acceptable to one organisation; they might not be for another. Project risk must be assessed and evaluated as part of the project selection. It is a kind of projects screening for red flags which can increase efficiency in the phase of project selection. Risk is associated with every investment activity. There is, of course, a normal business risk, which is uniformly applicable to all business ventures. But over and above this normal risk, some businesses are more risky than others. An entrepreneur will not venture into any high-risk project unless the return is also high. The risk element will be high in a project where the product or process is new. Risk also increases in uncertain socioeconomic conditions, where probability of failure is higher than the normal level. In a risky project, or a project in a risky situation, the return must be high not only because greater compensation is required for the higher risk taken, but also because a risky project should pay for itself quickly. (Hrishikes Bhattacharya, 2011)