CHAPTER 2 Assignment

3. A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and
$15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of
return is 20 percent, conduct a discounted cash flow calculation to determine the NPV.

 ROI = 20%
 Initial Investment = $50,000
 Cash inflow : $15,000, $25,000, $30,000, $20,000, $15,000
 Total return in 5 years = $105,000
 PV=𝑭𝑽𝑿𝟏(𝟏+𝒓)𝒏
 Sum of PV = PV1 + PV2+PV3+ PV5
 NPV=

Year Estimated cash inflow

1 $15,000
2 $25,000
3 $30,000
4 $20,000
5 $15,000
Sum of PV $62,895.45
Investment
$50,000
Cost
NPV $12,895.45

4. You work for the 3T company, which expects to earn at least 18 percent on its investments. You
have to choose between two similar projects. The following chart shows the cash information for

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 each project. Which of the two projects would you fund if the decision is based only on financial
information? Why?
 ROI = 18%

Omega Project Alpha Project

Estimated Estimated
Year Year
cash inflow cash inflow
1 ($190,000) 1 ($50,000)
2 $150,000 2 $150,000
3 $190,000 3 $200,000
4 $215,000 4 $250,000
5 $175,000 5 $150,000
6 $197,000 6 $180,000
7 $70,000 7 $90,000
Sum of $344,689.0 Sum of $476,525.4
PV 7 PV 9
Investmen Investmen
$225,000 $300,000
t Cost t Cost
$119,689.0 $176,525.4
NPV NPV
7 9

 We can accept Both Omega and Alpha project because NPV positive
 Alpha project/Investment is better than omega in NPV

6. You are the head of the project selection team at Broken Arrow records. Your team is considering
three different recording projects. Based on past history, Broken Arrow expects at least a rate of

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 return of 20 percent. Given the following information for each project, which one should be
BrokenArrow’s first priority? Should Broken Arrow fund any of the other projects? If so, what should
be the order of priority based on return on investment?

 ROI = 20%
Time Fades Away On the Beach Tonight’s the Night
Estimated Estimated Estimated
Year Year Year
cash inflow cash inflow cash inflow
1 $600,000 1 $400,000 1 $200,000
2 $75,000 2 $100,000 2 $125,000
3 $20,000 3 $25,000 3 $75,000
4 $15,000 4 $20,000 4 $20,000
5 $10,000 5 $10,000 5 $10,000
Sum of PV $574,909.98 Sum of PV $430,909.21 Sum of PV $310,538.84
Investment Investment Investment
$600,000 $400,000 $200,000
Cost Cost Cost
NPV -$25,090.02 NPV $30,909.21 NPV $110,538.84
Broken Arrow should choose to firstly invest in the Tonight’s the Night
project, then they can follow up with the On the Beach project. The Time Fades Away
project proves no feasible based on the company’s expectations

Order should be :
Broken Arrow should choose to firstly invest in the Tonight’s the Night
project, then they can follow up with the On the Beach project. The Time Fades Away
project proves no feasible based on the company’s expectations.
Broken Arrow should choose to firstly invest in the Tonight’s the Night
project, then they can follow up with the On the Beach project. The Time Fades Away
project proves no feasible based on the company’s expectations
Broken Arrow should choose to firstly invest in the Tonight’s the Night
project, then they can follow up with the On the Beach project. The Time Fades Away
project proves no feasible based on the company’s expectations
 1- The Tonight’s the Night project,
 2- On the Beach project.
 3- The Time Fades Away project is not a good investment as NPV is negative

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 7. The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects.
Below are five projects under consideration.
a. Using the scoring matrix in the following chart, which project would you rate highest? Lowest?

1- By calculating the total weighted score for each project

supports- 10%-of-sales-
strong- fill-the- weighted-
Criteria business- urgency from-new- competition
sponsor market total
strategy products
weight 2 5 4 3 1 3
project-1 9 5 2 0 2 5 68
project-2 3 7 2 0 5 1 57
project-3 6 8 2 3 6 8 99
project-4 1 0 5 10 6 9 85
project-5 3 10 10 1 8 0 107

 Project 5 is has the highestst rate and project 2 is the lowest rated

b. If the weight for “Strong Sponsor” is changed from 2.0 to 5.0, will the project selection change? What
are the three highest weighted project scores with this new weight?

supports- 10%-of-sales-
strong- fill-the- weighted-
Criteria business- urgency from-new- competition
sponsor market total
strategy products
weight 5 5 4 3 1 3
project-1 9 5 2 0 2 5 95
project-2 3 7 2 0 5 1 66
project-3 6 8 2 3 6 8 117
project-4 1 0 5 10 6 9 88
project-5 3 10 10 1 8 0 116

 It will change and the order will be as follow: Project 3 is the highest then Project 5 then Project
4

b. Why is it important that the weights mirror critical strategic factors?

Because the weight is defined based on organization need so it varies from organization to another
that’s why it gives the measure of how important the projects are for our own model. High weights
are always assigned to most critical or important factor, so that a project that addresses that

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 particular problem will get high score and get selected. Therefore, the critical strategic factors need
to be get mirrored by the weights so that the projects which contribute the most to the strategic
plans could be selected.

Case 2.1: Hector Gaming Company

a. What is our major problem?

The Major problem is that there were no clear predefined goals so the management that’s why they
lost the direction because of not having a clear vision of where the company is going to, also not
having a clear strategy for its long-term and short-term goals. This poor vision leads them to
choosing and prioritizing their projects based on their opinion rather than according to the
company’s. Moreover, the project deadlines are not being met, the financial resources are not being
allocated properly and the projects are not handled on a priority basis.

b. Identify some symptoms of the problem.

1. Un clear idea of the target market

2. Lack of teamwork and communication between the managers, there is no coordination between the
managers along with Conflicts among the management regarding budgeting.
3. Attacks from competitors who want to take their potential employees as evident by the efforts of
another gaming company to hire a product development employee that worked in HGC.

c. What is the major cause of the problem?

 The major problem with this company that there is no clear direction for the whole company as they
don’t have common objectives, poor

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 Case 2.3: Fund Raising Project Selection case

Project Proposal 1 to 6 Evaluation Form:( Must Objectives)

Must objectives Must meet if impacts 1 2 3 4 5 6

Be safe, legal, & comply with Y = yes

Y Y Y Y Y Y
University Policies N = no
Y = yes
Earn at least $500 Y Y Y Y Y Y
N = no
Can be completed within 9 Y = yes
Y Y Y Y Y Y
weeks N = no

Opportunity to learn Project Y = yes

Y Y N Y Y Y
management N = no

 Project Proposal 1 to 6 Evaluation Form:( Want Objectives)

Relative Single project
Want objectives importance impact 1 2 3 4 5 6
1-100 definitions
90 0: 500–750 2 2 1 1 0 1
Earning 1: 750–1500
potential 2: >$1500
3: >$2000
30 0: None 2 2 2 2 2 1
Fun 1: Some fun
2: A lot of fun
Increase 30 0: No potential 2 2 1 1 1 2
awareness of 1: Low potential
charity 2: High potential
40 0: No potential 2 2 0 1 1 1
Resume worthy 1: Low potential
2: High potential
Be featured 40 0: No potential 2 2 1 2 2 1
on local TV 1: Low potential
news 2: High potential
10 10 5 7 6 6
Total weighted score

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 1 2 6 3 4 5
Priority Ranking