PROJECT MANAGEMENT

Project Selection
 MULTIPLE CRITERIA IN
PROJECTS
• Investment • Future growth
• Return (IRR,…) prospects
• Payback • Similarity to
• Net Present existing business
Value • Environmental
• Risk implications
EVALUATION OF PROJECTS
• Rarely would one project emerge as the best
on all the chosen criteria
• If this happens it is the dominant project
and should clearly be chosen
• In general there would be a set of non-
dominated projects the choice out of which
is not normally easy
• Management priorities to various criteria
could help decision making
 CRITERIA

TANGIBLE INTANGIBLE
(measurable in (not measurable on
Rs., percentage, a well defined scale)
year, Rs/year, …)
 DECISION MATRIX
Criteria C1 C2 C3 . . . Cn
Projects
P1 x11 x12 x13 x1n S1
P2 x21 x22 x23 x2n S2

Pm xm1 xm2 xm3 xmn Sm

 NON DOMINATED
SOLUTIONS
Return
P1
P6
P2

P3 P5 P8
P7

P4
NPV
 WEIGHTAGES TO CRITERIA
The priorities or weights to the different
criteria may be obtained by:
• Mutual consultations or opinion polls
• Pair wise comparison between criteria
• Establishing a hierarchy of priorities and
using AHP (developed by Saaty)
 CRITERIA FOR PROJECT
SELECTION (Worst - Best)
C1 Investment (in lakhs of Rs) (10 - 2)
C2 IRR (percentage) (10 - 40)
C3 Payback (years) (10 - 2)
C4 Risk (v high, high, medium, low, v low)
C5 Future growth
( v poor, poor, medium, good, v good)
C6 Similarity to existing business
(v poor, poor, medium, good, v good)
 PERFORMANCE OF
COMPETING PROJECTS
Criteria
C1 C2 C3 C4 C5 C6
P1 10 40 8 high good v. good
P2 6 25 4 v.high medium good
P3 8 30 10 low v.good medium
P4 3 10 2 medium poor v.poor
P5 2 20 2 v.low v.poor poor
 Fighter Aircraft Selection
(An Example)
X1 Maximum speed (Mach number)
X2 Ferry range (Nautical miles)
X3 Maximum payload (Lbs)
X4 Acquisition cost (Million dollars)
X5 Reliability (High - low)
X6 Maneuverability ( High - low)
 Fighter Aircraft Example
(Decision Matrix)
X1 X2 X3 X4 X5 X6
A1 2.0 1500 20,000 5.5 avg. v.high
A2 2.5 2700 18,000 6.5 low avg
A3 1.8 2000 21,000 4.5 high high
A4 2.2 1800 20,000 5.0 avg avg
(X4 is a cost criterion, others are benefit criteria)
 SCALE FOR INTANGIBLES
Cost attributes Benefit attributes
0
very high 1.0 1.0 very low
high 3.0 3.0 low
average 5.0 5.0 average
low 7.0 7.0 high
very low 9.0 9.0 very high
10
 Technique for Order Preference using
Similarity to Ideal Solution (TOPSIS)
Step 1 Obtain the decision matrix after
using a numerical scale for intangibles.
X1 X2 X3 X4 X5 X6
A1 2.0 1500 20,000 5.5 5 9
A2 2.5 2700 18,000 6.5 3 5
A3 1.8 2000 21,000 4.5 7 7
A4 2.2 1800 20,000 5.5 5 5
 NORMALIZED DECISION
MATRIX
Step 2 Obtain the normalized decision
matrix, R, using the relationship
rij = xij/sq root (sum, i=1...m of xij2)
0.4671 0.3662 0.5056 0.5063 0.4811 0.6708
0.5839 0.6591 0.4550 0.5983 0.2887 0.3727
0.4204 0.4882 0.5308 0.4143 0.6736 0.5217
0.5139 0.4392 0.5056 0.4603 0.4811 0.3727
 WEIGHTED DECISION
MATRIX
Step 3 Obtain the weighted decision matrix
V by multiplying each column of R by the
corresponding weight.
W = ( 0.2, 0.1, 0.1, 0.1, 0.2, 0.3)
0.0934 0.0366 0.0506 0.0506 0.0962 0.2012
0.1168 0.0659 0.0455 0.0598 0.0577 0.1118
0.0841 0.0488 0.0531 0.0414 0.1347 0.1565
0.1028 0.0439 0.0506 0.0460 0.0962 0.1118
 IDEAL & NEGATIVE IDEAL
SOLUTIONS
Step 4 Obtain the ideal (A*) and the
negative ideal (A-) solutions from the
weighted decision matrix V.
A* =
(0.1168, 0.0659, 0.0531, 0.0414, 0.1347, 0.2012)
A- =
(0.0841, 0.0366, 0.0455, 0.0598, 0.0577, 0.1118)
 SEPARATION MEASURES
Step 5 Compute the separation measures
from the ideal (Si*) and the negative ideal
(Si-) solutions for all alternatives, i=1,...,m.
Si* = Sq root ( sum of squares for j=1,...,n of
(vij-vj*))
Si- = Sq root (sum of squares for j=1,...,n of
(vij-vj-))
 VALUES OF SEPARATION
MEASURES
Separation measures from:
Ideal solution Negative ideal solution
S1* = 0.0545 S1- = 0.0983
S2* = 0.1197 S2- = 0.0439
S3* = 0.0580 S3- = 0.0920
S4* = 0.1009 S4- = 0.0458
 RELATIVE CLOSENESS TO
IDEAL SOLUTION
Step 6 For each alternative determine the
relative closeness to the ideal solution
( Ci*, i=1,...,m) as
Ci*= Si- / (Si*+Si-) Ideal solution

Negative ideal
solution Si*

Si-
Alternative i
 RELATIVE CLOSENESS
VALUES
C1* = 0.643
C2* = 0.268
C3* = 0.613
C4* = 0.312
(Notice that the closeness rating is a number
between 0 and 1, with 0 being the worst
possible and 1 the best possible solution)
 RANK THE PREFERENCE
ORDER
Step 7 Determine the preference order by
arranging the alternatives in the
descending order of Ci*, i=1,...,m.
Thus the ranks for the alternatives in the
fighter aircraft selection problem using
TOPSIS emerge as
A1, A3, A4, A2
 SIMPLE ADDITIVE
WEIGHTIING (SAW)
Step 1: Obtain the decision matrix after
converting intangibles to numbers
X1 X2 X3 X4 X5 X6
A1 2.0 1500 20,000 5.5 5 9
A2 2.5 2700 18,000 6.5 3 5
A3 1.8 2000 21,000 4.5 7 7
A4 2.2 1800 20,000 5.5 5 5
 NORMALIZATION
Step 2: Obtain the normalized decision
matrix R (rij, i= 1,..., m: j=1,...,n) using
rij = xij/ xj* , if the jth criterion is a benefit
criterion, and
rij = xj-/ xij , if the jth criterion is a cost
criterion
 FINAL SCORES
Step 3: Using the weights for the different
criteria obtain the weighted score for
each alternative using the normalized
decision matrix
Step 4: Based on the final scores, rank the
alternatives for a decision by the decision
maker
 NORMALIZED DECISION
MATRIX
A1 0.80 0.56 0.95 0.82 0.71 1.00 0.835
A2 1.00 1.00 0.86 0.69 0.43 0.56 0.709
A3 0.72 0.74 1.00 1.00 1.00 0.78 0.852
A4 0.88 0.67 0.95 0.90 0.71 0.36 0.738

W (0.2 0.1 0.1 0.1 0.2 0.3)

Ranking of alternatives with SAW :
A3, A1, A4, A2
 SAW & TOPSIS
(A Comparison)
Rankings obtained using two Multi attribute
decision making techniques need not be
identical.
For the Fighter Aircraft Selection Project
SAW gave a ranking A3, A1, A4, A2
TOPSIS gave a ranking A1, A3, A4, A2
 SUMMARY
• Project selection involves consideration of
multiple, often conflicting criteria among
alternatives.
• Project appraisal leads to evaluations which
may be tangible, incommensurate or
intangible.
• Intangibles are evaluated on a numerical
subjective scale.
 SUMMARY
(Continued)
• A decision matrix with numerical
evaluations is the starting point for MADM
methods.
• Different methods vary in their
normalization schemes and in the manner in
which scoring of alternatives is done.
• A fighter aircraft example was illustrated
using both TOPSIS and SAW.