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Strategic Implications Of Project Portfolio Selection

Author

Listed:
  • Guilherme Vitolo
  • Flavio Cipparrone

Abstract

This paper evaluates the relationship between corporate strategy and quantitative financial criteria for choosing the optimal set of projects for the Capital Budget. On the basis of the competitive dynamics of the industry and the corporate strategy, different sets of projects should be selected to compose the project portfolio. The choice of the best criteria for project selection is mandatory, even though it is hard to find in both corporate and academic literature recommendation about which criteria should be selected to fit a predefined strategy. In order to evaluate that, this paper analyzed several combinations of risk and return metrics to compare the resultant set of projects and their strategic implications. The results pointed out that while Net Present Value combined with Value at Risk provided the most relevant results in terms of long term value creation, it is important to figure out how different strategies can be best implemented through portfolios selected by other criteria – e.g., fast returns on investment obtained by the Adjusted Payback Period and high profitability based on the Profitability Index or Internal Rate of Return. Such results present a relevant contribution for managers who typically face with the Capital Budget problem.

Suggested Citation

  • Guilherme Vitolo & Flavio Cipparrone, 2014. "Strategic Implications Of Project Portfolio Selection," Accounting & Taxation, The Institute for Business and Finance Research, vol. 6(2), pages 11-20.
    • Handle: RePEc:ibf:acttax:v:6:y:2014:i:2:p:11-20
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    References listed on IDEAS

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    1. Janne Gustafsson & Ahti Salo, 2005. "Contingent Portfolio Programming for the Management of Risky Projects," Operations Research, INFORMS, vol. 53(6), pages 946-956, December.
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    4. Prokopczuk, Marcel & Rachev, Svetlozar T. & Schindlmayr, Gero & Truck, Stefan, 2007. "Quantifying risk in the electricity business: A RAROC-based approach," Energy Economics, Elsevier, vol. 29(5), pages 1033-1049, September.
    5. Chen, Qi & Jiang, Wei, 2004. "Positive hurdle rates without asymmetric information," Finance Research Letters, Elsevier, vol. 1(2), pages 106-112, June.
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    More about this item

    Keywords

    Capital Budget; Project Portfolio Management; Project Portfolio Strategy; Project Selection; Monte Carlo Simulation; Investment Decision Criteria;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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