Chpt 2, 17. What is the difference between profitability and scoring models?

Describe a model that could fit both categories.

scoring models
The output of a scoring model is strictly a
relative measure. Project scores do not
represent the value or utility associated
with a project and thus do not directly
indicate whether or not the project should
be supported.
Scoring models allow multiple criteria to be
used for evaluation and decision making,
including profit/profitability models and
both tangible and intangible criteria.
Scoring models are intuitive and reflect the
way we think about making choices: what
are our options, what are the important
criteria, what is the most important
criterion, and how do the options compare
on the criteria.
Scoring models can be easily altered to
accommodate changes in the environment
or managerial policy.

If one uses a weighted scoring model to aid

in project selection, the model can also
serve as an aid to project improvement.

Profitability/financial models
With a few exceptions, profitability
model output is on an absolute
profit/profitability scale and allows
absolute go/no-go decisions.
Profitability models ignore all
nonmonetary factors except risk.
Despite wide use, financial models rarely
include nonfinancial outcomes in their
benefits and costs.

Profitability models like the discounting

models are nonlinear, and the effects of
changes (or errors) in the variables or
parameters are generally not obvious to
most decision makers. These models are
sensitive to errors in the input data for the
early years of the project.
The payback period method of the
profitability model also serves as an
(inadequate) proxy for risk.

Taking an example of weighted factor scoring model for selecting a mutual fund.
Criteria
Weights
Risk-to-return
10
0.4
ratio
Expense ratio
5
0.2
Bond duration
7
0.28
Manager tenure 3
0.12
Total
25
1
http://www.investing-in-mutual-funds.com/
Criteria
Risk-to-return
ratio
Expense ratio
Bond duration

Description
The coefficient of variation of a fund's standard deviation
divided by its return.
The percentage of assets deducted each fiscal year for fund
expenses.
The weighted average time to maturity based on the present
value of the cash flow expected from the bond discounted at the
bond's current yield to maturity.

Manager tenure

The length of time a mutual fund has been under the guidance
of the current manager.

The above model fits both profitability and scoring model as it takes into
consideration accounting and financial tools like present value of cash flow along
with nonfinancial criteria like manager tenure.
Chpt 2, 18. Contrast the window-of-opportunity approach with discovery driven
planning.
window-of-opportunity
Given some idea for a new product or
process; cost, timing, and performance
specifications that must be met by this
new technology are determined before
any R & D is undertaken.

discovery driven planning

In this approach the assumptions
regarding the costs, benefits, etc. of the
project are written down and analyzed;
and funds enough to verify these initial
assumptions are disbursed.

The current production process is

analyzed in detail and the level of
improvement needed from the new
technology project is determined.

When the funds are gone, the

assumptions are reevaluated. If a
critical assumption proves to be invalid,
management rethinks its strategy.

If estimates of the benefits from the

new technology project meet the
required level of improvement in a
resource effective way, the new
technology project is approved.

This process continues as the stages of

the project are executed so that at any
point in the project, management can
step in and terminate it if conditions
change and the project looks less
promising.