Reference no: EM13217002

The process of evaluating the project should be separated from the ranking process of the project in the portfolio, the first step to be done is to define the organization strategic goal, and then set criteria to evaluate the projects then take the decision whether to take, kill or transform that project and then the last step is to rank the projects based on the linkage between the selected project with the organization strategic goal and also based on the business value of that project.

There are many methodologies used in valuing projects; however methodologies differ from one organization to the other depending on the nature of the projects and the culture of the organization. These methodologies can be based on quantitative values or qualitative values.

According to Copeland & Tufano (2004) "projects are thus options- real options as opposed to financial options" and this defined as the option-based methodology. Mostly Real option based on assumptions and experience hence uncertain and unavailable information while in the other hand data needed to value financial option mostly available and clear, for instance options in IBM shares can be taken based on the current price of IBM stock which is easily available. Another different between the real option and the financial option is that the terms and the right to exercise the financial option is clear and defined where this is not the case in the real option since terms of real option is not clear.

From above we can observe that option based methodologies for valuating projects have its drawbacks , particularly real option which suffer from complexity and technical difficulties, the main reason behind that as identified by Copeland & Tufano (2004) is the " disconnection between the way managers value options and the way they manage them" the solution here is to either give up the whole option based methodology and adopt another methodology or modify the model so that more accurate values will be available for the option and that can be done by assuring optimal behavior.in additional managers should know when is the appropriate time to implement real option and similarly financial option. In the other hand the option based methodologies is considered a tool that perfectly discover the project's contingencies.

CASE STUDY

In SB the process of evaluating and ranking projects was divided into three phases: (Sharpe& Keelin, 1998)

Phase-1: Generating alternatives: the team would be required to generate at least four alternatives this allows new ideas generation, project improvement and lessons learned that can be used in other projects. However these alternatives are not been evaluated till there are on board.

Phase-2: Valuing alternatives using decision analysis method which provide transparency and adequate data. Evaluation of alternatives is done by a group of analysts this relief the project team members and top managers.

Phase-3 Creating a portfolio and allocation resources based on the entire four project alternative which consume a lot of time however this process reduce the argument in the resources allocation.