SAB4#22_Project_Selection_Method

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• (a panel of people who try to shoot down a new project idea). This involves a committee asking tough questions from each project

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• Different projects are given scores based on certain defined criteria. Project with higher score is selected.

1. Present Value (PV)

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   • Present value means the value today of future cash flows. ESP Valor Presente
2. Net Present Value (NVP)

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   • It is the present value of the total benefits (income or revenue) minus the costs over many time periods. Generally, if the NPV is positive, the investment is a good choice unless an even better investment opportunity exists. The project with the greatest NPV is typically selected. ESP Valor Presente Neto
3. Internal Rate of Return (IRR)

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   • NOTE: You will  not have to perform any IRR  calculations on the exam. Simply know the higher the IRR the better. IRR. The rate (read it as "interest rate" at which the project inflows ("revenues") and project outflows ("costs") are equal.
4. Payback Period

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   • This term refers to the length of time it  takes for the organization to recover its investment in the project before it starts accumulating profit.
5. Cost-Benefit Analysis

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   • Cost-benefit analysis compares the expected costs of the project to the potential benefits it could bring the organization. * A benefit cost ratio of >1 means the benefits are greater than the costs. *A benefit cost ratio of <1 means the costs are greater than the benefits. * A benefit cost ratio of =1 means the costs and benefits are the same.