The Price is Right : Project valuation for Project Portfolio Management using Markov Chain Monte Carlo Simulation
Abstract: A common managerial problem in the project-based organization is the problem of resource allocation. In practice this problem is addressed by applying project portfolio management. In this study we examine project portfolio management in a consultancy firm by applying a mathematical model. The information produced by this model could enable rational decision making and thus improve the economic resilience and reduce internal uncertainty in the firm so that it may live long and prosper. The proposed model is based on a Markov process that represents the projects in the firm. The parameters are estimated by Maximum Likelihood and the results are estimated through Monte Carlo Simulation. This study initially shows that it is possible to model the project portfolio as a Markov process. This was supported by the conducted literature review and illustrated by the presented model. Furthermore, we conclude that the value of accepting a project is dependent on the current state of the firm in terms of available capacity and firm characteristics regarding the processes of project arrival and completion. Last we show how the acceptance of a new project leads to a decrease in the cost-based price. However, large uncertainties stemming from the lack of relevant data and model simplifications limits the use of this model to that of an indicative aid in decision processes.
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