Your consulting company, Terrific Project Management Partners (TPMP) has been asked to help an established investments company, Best Investment Company (BIC), use project selection methods. BIC tends to take on any project proposal so it has become increasingly difficult to manage the company’s project portfolio. BIC would like to ensure that its projects have the best financial returns, BIC decided to use financial return as their major project selection method.
Project Management – Assignment V
- Your consulting company, Terrific Project Management Partners (TPMP) has been asked to help an established investments company, Best Investment Company (BIC), use project selection methods. BIC tends to take on any project proposal so it has become increasingly difficult to manage the company’s project portfolio. BIC would like to ensure that its projects have the best financial returns, BIC decided to use financial return as their major project selection method.
Assist BIC to decide which of the following projects offer the best financial return using the following methods: Benefit-cost ration, Payback period, and Net present value. The time value of money (interest rate) is 5 percent. Explain the significance of the financial return shown by each selection method.
Build and investment kiosk. Initial cost is $5 million to install in targeted locations and return is expected to be $750,000 the first year, $300,000 per quarter over the next two years, $1,000,000 semiannually for the 4th year, and $750,000 semiannually for the next two years.
Create a program to recruit community financial advisors. Initial cost is $8 million to recruit and train advisors, and return expected to be $1.5 million for the first year, $400,000 per quarter over the next three years, and $750,000 semiannually for the next two years.
Build franchises that work like fast food restaurants in strip malls. Initial cost is $11 million to build or convert existing buildings in targeted locations and to hire employee, and return is expected to be $1 million for the first six months, $2.5 million the second six months, $500,000 per quarter the second year, $600,000 per quarter third year, $3 million annually for the next three years.
- A financial services company has three potential projects to consider for the year. managers at this company must decide which project to pursue and how to define the scope of the project selected for approval. The company has decided to use a weighted decision matrix to help in project selection, using criteria to map to corporate objectives. All projects selected must develop a WBS using corporate guidelines.
You are part of a team that will analyze proposals and recommend which project to pursue. Your team has decided to create a weighted decision matrix using the following criteria and weights.
|1.||Enhances new product development||20%|
|4.||Has good NPV||35%|
To determine the score for the last criterion, your team has developed the following scoring system.
- NPV is less than 0, the score is 0
- NPV is between 0 and $100,000 the score is 25
- NPV is between $100,000 and $200,000 the score is 50
- NPV is between $200,000 and $400,000 the score is 75
- NPV is above $400,000 the score is 100
The company uses a 10 percent discount rate for the NPV calculation.
The following is information for three potential projects:
Project 1: Scores for criteria 1, 2, and 3 are 10, 20, and 80 respectively. estimated cost for the first year are $500,000 and costs for years 2 and 3 are $100,000 each. Estimated benefits for years 1, 2, and 3 are $200,000, $400,000 and $600,000 respectively.
Project 2: Scores for criteria 1, 2, and 3 are all 50. Estimated costs the first year are $700,000 and costs for the second year are $200,000. Estimated benefits for years 1 and 2 are $300,000 and $700,000 respectively.
Project 3: Scores for criteria 1, 2, and 3 are 0, 50, and 80 respectively. Estimated costs the first year are $300,000 and costs for years 2, 3, and 4 are $100,000 each. Estimated benefits for years 1, 2, 3, and 4 are $0, $600,000, $500,000, and $400,000 respectively.
Determine which project should be selected based on the criteria and information given.
- Jerry is project manager for Fun Days Vacation Resorts. He is working on three different project proposals to present to the executive steering committee for review. As part of the information-gathering process, Jerry attends the various resorts pretending to be a guest. This give him a feel for what Fun Days guests experience on their vacations, and it better prepares him to present project particulars and alternatives.
Jerry has prepared the project overviews for three projects and called upon the experts in marketing to help him out with the projected revenue figures. He works up the numbers and finds the following:
- Project A – payback period = 5 years; IRR = 38 percent
- Project B – payback period = 3.5 years; IRR = 23 percent
- Project C – payback period = 2 years; IRR = 21 percent
Funding exists for only one of the projects. Fun Day Vacation Resorts as a policy prefer to recoup their investments as early as possible, in order to reduce the time based risks involved in their industry.
Jerry recommends Project A and predicts this is the project the steering committee will choose since the projects are mutually exclusive.
Jerry’s turn to present comes up at the steering committee. Let’s listen in on the action. “And on top of all the benefits I’ve just described, Project A provides an IRR of 38 percent, a full 15 percent higher than the other two projects we discussed. I recommend the committee choose Project A.”
“Thank you Jerry” Colleen says. “Good presentation.” Colleen is the executive chairperson of the steering committee and has the authority to break ties or make final decisions when the committee can’t seem to agree.
“Nevertheless, other relevant factors should also be taken into consideration before making the final decision. As you all know, our industry is directly impacted by the health of the economy. The economic conditions are so volatile that anything can happen within a year or two. Therefore the risks and unknowns in our industry increase the longer the time it takes to recoup our investment.”
Based on the criteria and information given indicate which project the company should undertake. Give reasons for your answer.
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