PROJECT SELECTION BY RANKING

Capital Allocation By Ranking

INPUT   DATA ♥ EXAMPLE Of Input/Output

Title  

Currency Units

Capital Budget Limit

  Project ID   Cost   Benefit  
#       
1
2
3
4
5
6
7
8
9
10  
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

     Reset

OUTPUT   VARIABLES   &   GRAPHS

Number Selected
Total Cost Of Selected $1000
Total Benefits of Selected $1000
Average Benefit/Cost of selected  
Budget Unspent $1000

Ranking  Project ID  Cost  Benefit Benefit/Cost  Cum. Cost Cum. Benefits  Selected?  
#   ($1000)($1000)   ($1000) ($1000) Y/N
1
2
3
:
:
39
40
Grand Total
Total Selected
THEORY  &   FORMULAE

Project Selection By The Ranking Method

In any thriving organization, the number of potential projects will outweigh the capital dollars available. Thus, all capital projects cannot possibly be funded and the firm must ration capital to the best projects according to some order of merit. To accomplish this, a priority listing must be developed, rating the projects in order of merit.

Ranking by benefit-to-cost ratio method is usually the best choice of capital allocation when projects are independent with only one budget constraint. The method involves sorting the projects by benefit-to-cost in descending order, and then funding the projects from the top down until the budget is exhausted.

In the implementation here,
     - Cost is represented by NPC (Net present capital cost)
     - Benefits by (NPV) Net present value
     - Benefit-to-cost ratio = NPV/NPC (also commonly known as investment efficiency) is the Merit or Profitability Index that we seek to maximize.

Tips

    ◊ Use link EXAMPLE Of Input/Output  to demo data entry expectations and results; you may edit & use it as starting point
    ◊ Input: Enter monetary unit of interest, but avoid single quotes, i.e. SR"000 instead of SR'000. Five and up to 40 projects can be entered. Each project is defined by a project identity of up to 16 aphanumeric characters, a cost and benefits data.
    ◊ Output: The output is a ranked list of projects, with a Y (Yes) flag to indicate selection, and other statistics. The original sequence number of each project is appended to its projectID for easy referencing. Two graphs are plotted to show the sensitivity of benefits and qualifying projects to various levels of capital availability.

BIBLIOGRAPHY