Project Portfolio Ranking Example
Ten investment opportunities are available for the company this year. The budget is limited to 700,00€, though. What could be possible alternatives for the project investment portfolio?
| Proposal Nr. | PI | Initial investment [k€] |
|---|---|---|
| 1 | 0.85 | 224 |
| 2 | 1.04 | 372 |
| 3 | 0.72 | 541 |
| 4 | 1.12 | 441 |
| 5 | 0.91 | 325 |
| 6 | 1.06 | 241 |
| 7 | 1.14 | 552 |
| 8 | 1.16 | 370 |
| 9 | 0.64 | 650 |
| 10 | 0.65 | 710 |
Proposal Ranking
First step: Eliminate all not profitable proposals and rank them according to the PI:
| Proposal Nr. | PI | Initial Investment [k€] |
|---|---|---|
| 8 | 1.16 | 370 |
| 7 | 1.14 | 552 |
| 4 | 1.12 | 441 |
| 6 | 1.06 | 241 |
| 2 | 1.04 | 372 |
Possible Portfolios
- Combo 1: 8+6
- Combo 2: 7
- Combo 3: 4+6
- Combo 4: 6+2
Most Economic Combination
NPV = (Sum(inflows) – Sum(outflows)) / Discount factor = Sum(IF)/D – Sum(OF)/D
PI = Sum(IF)/D / Sum(OF)/D → Sum(IF)/D = PI * Sum(OF)/D
Therefore:
NPV = PI * Sum(OF)/D – Sum(OF)/D
→ NPV = Sum(OF)/D (PI – 1)
→ For initial investment D = 1 (remember power 0)
→ So, if there is only initial investment → NPV = Initial investment * (PI – 1)
NPV Calculations
- Combo 1: 8+6: 370 * 0.16 + 241 * 0.06 = 73.7
- Combo 2: 7: 552 * 0.14 = 77.3
- Combo 3: 4+6: 441 * 0.12 + 241 * 0.06 = 67.4
- Combo 4: 6+2: 241 * 0.06 + 372 * 0.04 = 29.3
