Selection of a project based on cost
Every project’s success depends on how much time it is given before being started by the project managers. The selection of a project is an important task in itself. If done correctly, the chances of it succeeding are high. There are many ways to select the right project. The most efficient and analytical is the cost-based project selection process.
Any project’s primary objective is to maximize profits while minimizing costs. This technique helps to determine the cost of a project and allows you to choose the most economical option that will generate the highest profits with the lowest risks. There are many ways to estimate the cost of a project. Although each method has its own process, the goal of all is to help the management select the best project.
For a quick overview of some of the most popular methods of selecting the most lucrative projects based on cost-based analysis, read on.
Opportunity Cost Method
The opportunity cost method shows the earnings that are lost if you invest in a project. If you have Rs.10000 and the option to invest in shares or with fixed deposits in a bank, the opportunity cost is what you call it.
Pay-back Period Method
Payback period is the time period during which the project’s total cost can be recovered. This is one of most widely used methods to determine the feasibility of a project. For maximum returns, the project with a shorter payback period must be chosen.
This method, also known as cost-benefit ratio or cost-benefit ratio is used to compare the current cost of a project with the inflows or earnings. In the subsequent selection process, the project with a higher benefit rate is preferred.
Method of Net Present Value (NPV).
The Net Present Value method attempts to eliminate all future estimated costs from the Project’s Present Value, expressed in its NPV (Net Present Value). This method of cost-based project selection can also be used to determine the best option. A project with the highest Net Present Value is desirable.
Internal Rate of Return (IRR).
This is the rate at the which total profits equal total costs of the project. It is the rate at the Net Present Value is reached. The project that archives the NPV faster than the rest of the race ends up with an advantage.
Estimated Cash Flow Method
The estimated cash flow method projects the total cash outflows and inflows over a specified number of years. It gives a fair idea of the total cost and profit that the project will make over the years. The project with the greatest spread, i.e. The project with the highest total profit less total costs is chosen.
Method of Discounted Cash Flow
The difference between the discounted cash flow method and the estimated cash flow is that the total costs and profits are adjusted for inflation. This method is more visual than the estimated cash flow method. It shows the estimated costs, estimated profits and the spread.
Experienced project managers use different methods to determine the cost and profit estimates so that the best project can be chosen. Are you willing to do the same?
Author: Uma Dag