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    Project Selection Exercise: Scenario

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    Miguel Vienes
    The document describes a scenario where a company is seeking to improve its project selection process. It outlines three potential projects - an automated teller project, financial advisor project, and franchise project. It then provides rankings for each project based on key criteria and financial metrics like IRR and cash flows. Several questions are asked to analyze and rank the projects using different methods like weighted scoring, payback period, NPV, and IRR. NPV is recommended as it considers the time value of money and helps maximize firm value.

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    Project Selection Exercise: Scenario

    Uploaded by

    Miguel Vienes
    295 views6 pages
    The document describes a scenario where a company is seeking to improve its project selection process. It outlines three potential projects - an automated teller project, financial advisor project, and franchise project. It then provides rankings for each project based on key criteria and financial metrics like IRR and cash flows. Several questions are asked to analyze and rank the projects using different methods like weighted scoring, payback period, NPV, and IRR. NPV is recommended as it considers the time value of money and helps maximize firm value.

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    The document describes a scenario where a company is seeking to improve its project selection process. It outlines three potential projects - an automated teller project, financial advisor project, and franchise project. It then provides rankings for each project based on key criteria and financial metrics like IRR and cash flows. Several questions are asked to analyze and rank the projects using different methods like weighted scoring, payback period, NPV, and IRR. NPV is recommended as it considers the time value of money and helps maximize firm value.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    295 views6 pages

    Project Selection Exercise: Scenario

    Uploaded by

    Miguel Vienes
    The document describes a scenario where a company is seeking to improve its project selection process. It outlines three potential projects - an automated teller project, financial advisor project, and franchise project. It then provides rankings for each project based on key criteria and financial metrics like IRR and cash flows. Several questions are asked to analyze and rank the projects using different methods like weighted scoring, payback period, NPV, and IRR. NPV is recommended as it considers the time value of money and helps maximize firm value.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 6

    PROJECT SELECTION

    EXERCISE
    Scenario
    Edward J. Schwab’s governance committee has hired you to develop a project selection process. In the past, the
    company tended to take on too many proposed projects, causing the project teams to be overwhelmed with
    demands that they struggled to meet. Because of organizational growth, it is increasingly becoming difficult to
    manage the complexity of the portfolio of projects. You will help the company establish a semi-annual review
    process using a project selection matrix based on the company’s major project criteria.

    After extended discussions, you have helped the governance committee agree on the most important objectives for
    the company. You have also helped them create a weighting factor for each objective, per the following:

    CRITERIA WEIGHTING
    FACTOR
    Increase market share 5
    Increase margin 4
    Support culture of innovation 3
    Increase public awareness 1

    Regardless of the technique they ultimately pick for project selection, they want as much accuracy as possible
    without too much sophistication.

    1
    The Projects
    The organization is considering the following projects:

     Automated Teller project. Place specialized automated tellers in major shopping areas across the country. The
    initial cost is AED 5 million to install the machines in the highest value locations. The return is expected to be
    AED 750,000 the first year; AED 500,000 per quarter over the next two years; and AED 750,000 semi-annually
    after that. This project has an IRR value of 5.5%.

     Financial Advisor project. Rapidly expand our base of community financial advisors to service specific
    territories based on per-capita income. Initial cost is AED 8 million to recruit and train the advisors. The return is
    expected to be AED 1.5 million year one; AED 400,000 per quarter over the next three years; and AED 750,000
    semi-annually thereafter. This project has an IRR value of -2.5%.

     Franchise project. Build small footprint franchises in strip malls. Initial cost is AED 11 million for construction
    in targeted locations and hiring employees. The return is expected to be AED 1 million for the first six months
    followed by AED 2.5 million the second six months. The second year should see AED 500,000 per quarter, with
    AED 600,000 per quarter the third year and AED 3 million annually thereafter. This project has an IRR value of
    5%.

    Project Ratings
    CRITERIA ATM ADVISO FRANCHISE
    R
    Increase market share 5 7 7
    Increase margin 6 3 7
    Support culture of innovative offerings 9 5 4
    Increase public awareness 8 5 6

    2
    Questions
    1. Create a Weighted Scoring matrix to rank each of the projects.

    ATM Advisor Franchise


    Criteria Weight Score Total Score Total Score Total
    Market share 0.38 5 1.9 7 2.66 7 2.66
    Margin 0.31 6 1.86 3 0.93 7 2.17
    Innovation 0.23 9 2.07 5 1.15 4 0.92
    Public awareness 0.08 8 0.64 5 0.4 6 0.48

    Score 6.47 5.14 6.23

    2. What are some strengths of using a Weighted Scoring Model to rank projects? Weaknesses?

    Strength: Allow multiple criteria • Structurally simple • Direct reflection of managerial policy • Easily altered
    • Allow for more important factors • Allow easy sensitivity analysis

    Weakness: Relative measure • Linear in form • Can have large number of criteria • Unweighted models
    assume equal importance

    3. Rank each of the projects based on payback period.

    ATM Advisor Franchise


    Inflow Cumulative Inflow Cumulative Inflow Cumulative

    Year 1 750,000 750,000 1,500,000 1,500,000 3,500,000 3,500,000


    Year 2 2,000,000 2750,000 1,600,000 3,100,000 2,000,000 5,500,000
    Year 3 2,000,000 4,750,000 1,600,000 4,700,000 2,400,000 7,90,000
    Year 4 1,500,000 6,250,000 1,600,000 6,300,000 3,000,000 10,900,000
    Year 5 1,500,000 7,750,000 1,500,000 7,800,000 3,000,000 13,900,000
    Year 6 1,500,000 9,250,000 1,500,000 9,300,000 3,000,000 16,900,000

    Investment 3 2 1

    4. What are some strengths & weaknesses of the payback period method?

    Strength: Payback period is simple and easy to understand and compute.

    It’s used almost everywhere and easy to understand.

    3
    It gives more importance on liquidity for making decision about the investment proposals.

    You will now use NPV to help the governance committee make a better decision considering the time value of
    money. Assume an interest rate of 5% and calculate the NPV over 5 years for each project, allowing the committee
    to have comparable information for evaluating the projects. Use these to ease your calculations of PV:

    4
    Year 1: (1 + .05)1 = 1.0500

    Year 2: (1 + .05)2 = 1.1025

    Year 3: (1 + .05)3 = 1.1576

    Year 4: (1 + .05)4 = 1.2155

    Year 5: (1 + .05)5 = 1.2763

    5. Which of the three projects provides the best NPV (you can use the table below)? Rank them.

    ATM Advisor Franchise


    Year Inflows PV Inflows PV Inflows PV
    1 750,000 714,285.7 1,500,000 142,8571.4 3,500,000 3333333.3
    3
    2 2,000,000 181,4058.9 1,600,000 145,1247.2 2,000,000 1814058.9
    6 7
    3 2,000,000 1727712.51 1,600,000 138,2170.0 2,400,000 2073255.01
    4 1,500,000 1234060.16 1,600,000 131,6330.7 3,000,000 2468120.115
    2
    5 1,500,000 1175272.27 1,500,000 1175272.27 3,000,000 2350544.54

    Total 6,665,389.6 6753591.69 12039311.87

    Cost -5,000,000 -8000000 -11000000

    NPV 1665389.6 -1246408.3 1039311.87

    6. What are some advantages and disadvantages of using NPV to rank and select projects?

    Advantages:

    It gives us importance to the time value of cash

    Profitability and risk are given high importance

    Its helps in maximizing the value of the firm

    5
    Disadvantages:

    It’s difficult to use

    Decisions about mutually exclusive projects are not accurate

    Difficult to calculate the discount rate

    7. Rank the projects based on IRR.

    1. Automated Teller project

    2. Franchise project

    3. Financial advisor project.

    8. What financial return method would you recommend for this organization? Why?

    In my opinion NPV would be the most appropriate since it consider the time value of money and it would
    help maximize the value of the firm.

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