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Case 2

Phyllis Henry must choose between two new project proposals, Project Janus and Project Gemini, for her company Nova Western. Two evaluation teams used different methods and reached different conclusions. One team used a scoring model based on strategic categories and recommended Project Gemini. The other team did a financial NPV analysis and found Project Janus had a higher NPV. Phyllis is unsure which project to recommend due to the contradictory results.

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67 views1 page

Case 2

Phyllis Henry must choose between two new project proposals, Project Janus and Project Gemini, for her company Nova Western. Two evaluation teams used different methods and reached different conclusions. One team used a scoring model based on strategic categories and recommended Project Gemini. The other team did a financial NPV analysis and found Project Janus had a higher NPV. Phyllis is unsure which project to recommend due to the contradictory results.

Uploaded by

Prajakta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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3"2, Project Selection at h{ova
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\ul/estern, Inc. Lry,

Phyllis Henry vice president of new'product develop- Nova Western needed some new product ideas,
ment, sat at her desk, trying to'make sense of the latest *'-il;
and fast.
new project proposals she had just received from report Phyllis was reading contained the
her staff. Nova trVestern, Inc., a large developer of results of a project screening conducted by two
business software and application programs, had been independent groups within the new product devel-
experiencing a downturn in operating revenues over opment department. After several wee(s of analysis,
the past three quarters. The senior management team it appeared that two top cbntenders'had emerged
was f€eling pressure from the board of directors to eis the optimal new project oPporfi+nities" One project, I

code-hamed Janus, was championed by the head of


i

take steps to correct this downward drift in revenues I

software development" The other' project idea,


I
and profitability. Their consensus opinion was that I
,

referred to as Gemini, had the support of the business ' ProjectJanus


applications organization. Phillis' original charge to :
Initial investmsnl $!50,000
hii staff was to prepare an evaluation of both projects Life of the project = 5 years
in order to decide which one'Nova Western should Anticipated stream of future cash flows:
support. Because of budget restrictions, there was no Year 1 : $50,000
way that both projects could be funded. Year 2 : 100,000
The first evaluation team used a scoring model, Year 3 : 100,000
based on.the key strategic categories at Nova Western, to l'ear 4 : 200,000
evaluate the two projects. The categories they employed l'ear 5 75,000
were: ( 1 ) strategic fit, (2) probability of technical success, Calculated NpV = 960,99b
(3) financial risk, (4) potential profit, and (5) strategic
leverage (ability of the prgject to employ and enhance Project Gemini
company resources and.technical capabilities). Using :
Initial investmqnl $400,000
these catggories, the, team elaluated the truo Projects as
: : Life of the project : 3 years
shown below. Scores were based o(r: I low, 2
Anticipated stream of future cash flows:
medium,andS:high.
Year 1 75,000
Year 2 = 250,000'
ProjectJanus Year 3 : 300,000

Catego{ Importance Score Weighted Score Calculated NPV : $25,695

1. Strategic Fit ,) 2 6
2. Probability of r 9 9 4 The analyses of the two projects by different means
technical success had yielded different findings. The scoring r,nodel indi-
3. Financial risk 2 1 2
cated that Project Gemini was the best alternative and
4. Potential profit a c 9
the financial screening favored the higher project NPV
5. Strategicleverage 1 1 I of ProjectJanus. Phyllis was due to present her recom-
Score : 22 mendations to the full top management team this after-
Projec-t Gemini noon, seemingly ,ttt.i with more questions than
answers.
Category ImPortance Score Weighted Score

1. Strategic Fit 339 QUESTIONS FOR DISqUSSTON


2. Probdbility of 224
technical success
'
1. Phyllis has called you into her office to help her
3. Financial risk 224 make sense of the contradictions in project evalua-
4._Potential profit 339 tion. How'would you explain the reasons for this
5. Strategic leverage
.

t22 ' diu".g"nce of opinion from one technique to the


Score : 28 next? What are'the strengths and weaknesses of
each screening method?
The above results seem to suggest that Project
g
Choose the project that you feel, based on the
Gdmini is the choice for the.next new project. However, above analysis, Nova Western should select. Defend
Phyllis was also presented with an NPV analysis of the your choice.
two projects by her second team of evaluators. Assuming 3. What does the above case suggest to you about the
a required ipte of return of 15% and anticipated infla- use of project selection methods in organizations?
tion rate of TVo over the lives of the tvro proiects, their How would you resolve the contradictions found
findings are shown as follows: in this example?

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