The advantages of project prioritization method using analytic hierarchy process as a toll in the capital investment projects' decisions of a private electric distribution utility company

• Main Author: Manalo, Marivic Valenzuela
• Format: text
• Language: English
• Published: Animo Repository 2008
• Subjects: Capital investments; Electric power distribution; Business
• Online Access: https://animorepository.dlsu.edu.ph/etd_doctoral/228; https://animorepository.dlsu.edu.ph/context/etd_doctoral/article/1227/viewcontent/CDTG004509_P.pdf
• Institution: De La Salle University

This study is the result of Power Corporation managements intention to optimize their various capital investment decision processes within the organization. Since huge amount of corporate funds go to capital expenditure, the management of the firm decided to look for an alternative capital rationing model to revise the traditional techniques (i.e. net present value, internal rate of return and profitability index) that they are using. The alternative model should incorporate the non-financial aspects such as performance measurements with the corresponding risk analysis to determine how performance and risk factors may be altered to create the most utility for the least cost, in terms of the firms service cost, support cost and social cost. With this need of including qualitative factors and risk analysis in the selection of firms capital investment projects, an alternative model called the project prioritization method (PPM) using as tool the analytic hierarchy process (AHP) was developed. This study made use of the case study approach. In particular, this case study utilized the eclectic and comparative research design. The eclectic research design delves in developing models as an output of the research study while comparative study focuses on proving that the PPM with AHP as a tool has more advantages compared to the net present value (NPV), internal rate of return (IRR) and profitability index (PI) method of capital rationing decisions of Power Corporation. PPM is a process of selecting or prioritizing projects given the goals Project prioritization method using analytic hierarchy process Ramon V. del Rosario Sr. Graduate School of Business De La Salle University (corporate objectives) and limited resources (capital) of a company. It is a tool for systematic selection from among various alternatives with several criteria. AHP on the other hand is a method for ranking decision alternatives and selecting the best one when the decision maker has multiple objectives or criteria on which to base the decision. What makes capital investment decision so demanding is the element of risk that goes with every project that the firm has to make. Through the Electric Capital Project (ECP) Life Cycle risk analysis, the various risks that need to be addressed from the planning stage up to retirement stage of any capital projects of Power Corporation are properly addressed. All capital projects must undergo the life cycle risk analysis prior to subjecting them to the PPM model. The detailed steps in the application of the PPM model in the capital rationing decisions of Power Corporation as discussed in this paper was simulated in a pilot application to their 2003 approved Electric Capital Projects to compare the results with the existing NPV/IRR method. To answer the problem of the study of determining the advantages of adopting the PPM using the AHP as a tool in the capital expenditure projects of Power Corporation compared with the traditional capital rationing model (i.e., NPV, IRR, PI), the proponent made use of Kendall tau distance which is a non-parametric statistical tool to prove that PPM model will yield a different ranking compared to that of NPV/IRR model. Project prioritization method using analytic hierarchy process Ramon V. del Rosario Sr. Graduate School of Business De La Salle University In calculating the Kendall tau distance, the projects classified under substation, sub-transmission and distribution lines are first ranked separately using the PPM and NPV models. The next step is to pair the two rankings to count the number of times the values in the PPM list are in the opposite order of the values in the NPV list. The number of times the PPM list is in the opposite order of the values in the NPV list represents the Kendall tau distance. The last step is to compute for normalized Kendall tau distance. The following is the result for the three capital project classifications: 1) substation projects, 0.4; 2) sub-transmission, 0.357; and 3) distribution lines, 0.411. All these values indicate a low agreement in the rankings between the PPM and NPV models. Low agreement connotes a disagreement. Therefore, it can be concluded that the rankings for all the three capital project classifications under the two models are significantly different. Based on the results arrived at through the Kendall tau distance, PPM can be considered as a system which is completely different from the traditional NPV/IRR model of ranking; thus, the null hypothesis of the study that the ranking of capital investment projects using NPV, IRR and PI is similar to the ranking using the PPM model is rejected The results of the study show that a decision prioritization model is developed which takes into account both the financial and non-financial aspects such as performance measurements of the capital investment projects of Power Corporation. The PPM strategic goals of adequacy, reliability, flexibility, safety, Project prioritization method using analytic hierarchy process Ramon V. del Rosario Sr. Graduate School of Business De La Salle University system loss reduction and power quality which are basically anchored on the balanced scorecard of the firm have been properly addressed since these are all embedded in the model. The developed model can be applied to the different capital investment projects made by Power Corporation namely: substations; sub-transmission and distribution lines, thus, proving that the new model can be implemented to the different capital investment projects made by the firm. Therefore, it is more advantageous to adopt the Project Prioritization Method using analytic hierarchy process as a tool in the capital expenditure projects compared with the current models as used in Power Corporation since PPM is essentially connected to the balanced scorecard of the firm. In view of the research findings, discussion and conclusions, the proponent strongly recommends the adoption of the PPM using AHP as tool in the capital rationing decisions of Power Corporation. The addition of the project life cycle risk assessment prior to investment ranking allows managers to conduct regular risk assessment reviews that will identify any new areas of risk that have developed in the market/industry. The simplicity and practicality of the analytic hierarchy process technique and regular risk assessment can assist managers in making objective and effective decisions for the company. Project prioritization method using analytic hierarchy process Ramon V. del Rosario Sr. Graduate School of Business De La Salle University Project Prioritization Method can also be used in various decision analyses other than capital investment projects, such as to buy or to lease, to outsource or to hire, business development applications, new product development, employee performance ratings and other similar applications.