Selecting the right project is an important step for any organization. Project selection methodologies provide a systematic approach for selecting the project with maximum value to the organization. This is an important concept for project management professionals.

Present Value(PV) – PV indicates the present value of future cash flow. Projects having higher PV will be better. Present value of a future cash flow is discounted to reflect the time value of money.

Net Present Value(NPV) – NPV is the difference between cash inflow and out flow considering present value of both cash inflow and outflow. Again project with higher NPV is better. NPV should be positive for the project to be selected; negative NPV indicates negative cash flow.

Internal Rate of Return(IRR) –IRR is the rate at which the present value of investments is equal to the present value of return on all investments made. If there are multiple projects in consideration, project with higher IRR is better option.

Pay Back Period – Payback period is the time required to recover the cost of investment for the project. Payback period alone doesn’t consider time value of money or rate of return on the project. If other parameters are same, project with minimum payback period is better.

Benefit Cost Ratio (BCR)- BCR is the ratio of benefit  in terms of money to monetary cost of the project. If budget is not a constraint, higher the BCR better the project. All cost and benefits should be in terms of present value while comparing.

Economic Value Added(EVA) – EVA™ is net profit after deducting tax and capital expenditure. The project having more EVA is better for the company.

Opportunity Cost –Opportunity cost is the profit lost when one project is selected over other. For selection among multiple projects, lesser opportunity cost project should be selected

Sunk Cost –Sunk cost is the cost that is already incurred and can’t be reversed. Sunk cost should not be considered while taking a decision on project selection.

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