Lunar International College

Department of Project Management

Project Identification and Appraisal
Group Assignment
Group members
1. Samuel Ali
2. Eshetu girma
3. Hirko melka
4. Sisay ketema
5. Birhanu bikila
Submitted to: Solomon Kibret (PhD)
Dec 2020

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Part II. Workout.
1. ABC firm has submitted two project (A and B) proposals to the project identification and
implementation department that estimates with the following projected cash flow statement
presented in Table 1.1 for each project. The figures in the Table are in millions. The discount
rates for the two projects are 15 percent.

Cashflows/ 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Year
Inflows A 0 0 0 160 110 100 195 190 120 70 60 50
B 0 0 150 180 190 70 90 80 50 40 35 30
Outflows A 120 80 75 5 20 5 20 5 20 5 0 0
B 85 65 55 40 35 30 25 15 10 0 0 0

Basedon the aboveinformation,giventhat 2020 isthe initial period:

A) Which projectwould you suggest for the ABC firm if you were asked to make the
appraisal based on the MIRR approach?
Answer (A)
Cash flow/year pr 2020 2021 2022 202 2024 202 2026 202 20 202 20 20
oj 3 5 7 28 9 30
ec
t
inflow A 0 0 0 160 110 100 195 190 12 70 60 50
0
outflow A 120 80 75 5 20 5 20 5 20 5 0 0
Net cash flow A -120 -80 -75 155 90 95 175 185 10 65 60 50
0
PV of cash A -104.34 -60.60 -49.34 89. 44.7 41. 65.7 60. 28. 16. 12. 9.
flows 08 7 12 8 65 49 08 90

Project A: MIRR = (future value of +ve cash flows)/present value of –ve cash flows )(1/n)-1
= (368.21)/-214.25)1/12-1
= -1.71*-0.91
=1.56
MIRR= 15.6%

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 B) Calculateandinterpretthediscounted paybackperiodforeach project.
2. A company has established a project team to identify a location for a new manufacturing
facility. The relative weights for each criterion are shown in the following table. A score of 1
represents unfavorable, 2 satisfactory, and 3 favorable.

Location
Category Weight A B C
Labor costs 20 1 2 3
Labor productivity 20 2 3 1
Labor supply 10 2 1 3
Union relations 10 3 3 2
Material supply 10 2 1 1
Transport costs 25 1 2 3
Infrastructure 5 2 2 2

Based on the above information answer the following questions:

a) A company has established a project team to identify a location for a new manufacturing
facility. The relative weights for each criterion are shown in the following table. A score
of 1 represents unfavorable, 2 satisfactory, and 3 favorable.
b) Use an unweighted, 0-1 scoring model and compare it from a weighted scoring model.
Assume that a score of 1 means does not qualify and a 2 or 3 means it does qualify.
c) Revise the unweighted model by deleting all categories that, as recommended, have a
weight of less than 20 percent. Compare to your answer to (a) above and(b).Which
methodseems best?
ANSWER A.uses a weight scoring model to analyze candidate locations ₍A, B, C₎ for
setting up a new factor.
Location A. =(20X1+20X2+10X2+10X3+10X2+25X1+5X2)
=20+40+20+30+20+25+10=165
Location B. =(20X2+20X3+10X1+10X3+10X1+25X2+5X2)
=40+60+10+30+10+50+10=210
Location C. =(20X3+20X1+10X3+10X2+10X1+25X3+5X2)
=60+20+30+20+10+75+10=225
Location C Should be selected

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Answer B.for a score of I will give a score of 0 and for score 2 and 3 the score will be 1(on
the basis of 0₋1 scoring model) 0 means does not quality and 1 means will quality score for
ABC
category As given 0₋1 scoring B,s given 0₋1 C,s given 0₋1 scoring
score models score scoring score model
model
Labor cost 1 0 2 1 3 1
Labor productivity 2 1 3 1 1 0
Labor supply 2 1 1 0 3 1
Union relation 3 1 3 1 2 1
Material supply 2 1 1 0 1 0
Transport cost 1 0 2 1 3 1
Infrastructure 2 1 2 1 2 1
total 5 Total 5 total 5
As the total is same for all the 3 location (A, B, C all have total of 5) so, all three locations
are equally favorable
Answer C.
category A 0₋1 B 0₋1 C 0₋1
scoring scoring Scoring
model model model
Labor cost 20 1 0 2 1 3 1
Labor productivity 20 2 1 3 1 1 0
Transport cost 25 1 0 2 1 3 1
1 3 2
When we compare to our answer a and b ,we select location c by using weighted scoring
model and we selected all 3 location by using un weighted 0₋1 scoring model, while we
series the un weighted model by deleting all category which weighted less than 20%,
location B is should be selected. To conclude that, using a weighted scoring model seems
best.
3. ABC Company is considering the introduction of a new product, Alpha. The firmhas
gathered the following information relevant to the project:
Item Amount
Initial fixed capital outlay $120,000
Initial working capital outlay $9,800
Life of the project 5 years
Capital recovery at project end fixed $18,000; working $7,200
Sales units forecast 50,000 units in year 1, growing at 6% per
annum thereafter
Unit selling price $2.75
Unit production cost $1.28

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 Annual fixed overhead cost $35,000
Annual tax rate of depreciation claimable 20% per annum
Annual income tax rate 38%
Required rate of return 9% per annum

Based on the above information:

a) Calculate an NPV for the project under the given base-case scenario.
b) Perform sensitivity analyses on the following variables: initial fixed capital
outlay,unit selling price, annual sales growth rate, unit production cost.
c) By the use of Data Tables and appropriate graphs, calculate the break-even pointsfor
unit production cost and the required rate of return.
d) Advise management of the analyses regarding the new product Alpha, and make
appropriate investment recommendations.
ANSWER(A).
Year Inflow(outflow PVrate @9% PV
s )
0 -120000 1.0000 (120000)
0 -9800 1.0000 (9800)
1 32990 0.9174 30266.06
2 33900 0.8417 28533.12
3 35339 0.7722 27288.39
4 37244 0.7084 26384.62
5 39567 0.6499 25715.59
5 18000 0.6499 11698.76
5 7200 0.6499 4679.51
NPV 24766.04

ANSWER(B)
Sensitivity analysis on variables based on pessimistic, base-case and optimistic
forecast
pessimistic Base-case Optimistic
Initial fixed capital outlay $150,000 $120,000 $100,000
Unit selling price $2.00 $2.75 $3.10
Annual sales growth rate 2.00% 6.00% 9.00%
Unit production cost $1.92 $1.28 $0.64

Result of sensitivity analysis given below

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 Variables Pessimistic Optimistic NPV Range
NPV
Initial outlay $6,583 $41,803 $35,220
Forecast Unit selling price $(99,406) $72,969 $172,375
Annual sales growth rate $19,062 $34,493 $15,431
Forecast Unit production cost $(76,466) $110,465 $186,931

A rank ordering of the critical variables is:

1. Forecast production cost per unit
2. Forecast selling price per unit
3. Initial outlay
The impact of changes in these variables is quite significant on the project’s NPV.
Management would be well advised to investigate the possible behavior of these
variables before proceeding with the project, perhaps by simulating them.

ANSWER(C)
Particulars 1 2 3 4 5
Sales units(A) 21,332 22,611 23,968 25,406 26,931
Contribution(sales- 1.47 1.47 1.47 1.47 1.47
production cost or variables)
Contribution value 31357.30 33238.74 35233.07 37347.05 39587.88
Fixed cost 35000 35000 35000 35000 35000
Profit=contribution-fixed -3642.7 -1761.26 233.07 2347.05 4587.00
cost
PV rate @9% 0.9174 0.8416 0.7721 0.7084 0.6499
PV (3341.92) (1482.41) 179.97 1662.71 2981.80

ANSWER (D)
Under the most likely scenario, the new product will be a sound investment. It is
possible that the initial aspects of production cost control could be reviewed ex-
ante, (decisions which are made before a commitment is made to a project) and
controlled ex-post (which decisions are made after the project is commenced and
concerned with the day-to-day monitoring of the project), so these variableswould
not cause a negative NPV. Fortunately however the cost has increase about 36%
before the project becomes untenable.
Variation in selling price may be more damaging to the project. The price range
shows a plus variation of 12.7% and a minus variation of 27%. This relatively low
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 range has a large impact on the project’s NPV. The break-even analysis price is
calculated, as an extra piece of decision-making information, at$2.54. this is only
7.6% below the forecast price of $2.75. A price fall of this size is easily possible,
so management need to develop better forecast of this variable, or to ensure that it
is controllable in the market place.
With pessimistic forecasts, both of this variables result in a negative NPV for the
project, careful management control will be needed.
The initial outlay size is also a significant variable, but even under a worst-case
forecast it is still returns a positive NPV.