2019 09 10 Module 2 - Part 2 (Student)
2019 09 10 Module 2 - Part 2 (Student)
2019 09 10 Module 2 - Part 2 (Student)
Enterprise Planning
Module 2 – Part 2
Agenda
• Chapter 3 – The Project Selection & Portfolio Managment
– Project Selection
– Financial Concepts including Risk & Return
• In-Class Exercise – Using Financial Return on Investment
Models
2
Important for a Organization to Decide on
Process/Approach to Project Selection
• Multiple issues relative to Project Selection – align with
Business Culture, Vision, Mission and Strategic Direction
• Key Issues to Consider:
– Risk – Factors that reflect elements of unpredictability: Technical,
Financial, Safety, Quality, Legal
– Commercial – Factors that reflect the market potential of the project:
ROI, Payback, Market Share, Cash Requirements, Generation of New
Business
– Internal Operating Issues – Factors impacting the internal operations
of the business: Hire/train employees, Workforce size or composition,
Locations, Global versus Domestic
– Additional Factors – Intellectual Property, Impact on Company’s
Image, Strategic Fit
3
Approaches to Project Screening
4
Analytic Hierarchy Process
The AHP is a four step process:
1. Construct a hierarchy of criteria and subcriteria.
2. Allocate weights to criteria.
3. Assign numerical values to evaluation dimensions.
4. Determine scores by summing the products of numeric
evaluations and weights.
• Be able to calculate
project alignment
with these critical
factors for business
success?
Analytical Hierarchy Process (AHP)
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AHP continued AHP Worksheet Link
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Profile Model – Risk versus Return
• Payback period
• Net present value
• Discounted payback period
• Internal rate of return
Investment
Payback Period
Annual Cash Savings
15
Enter Data in Worksheet – Rate of Return, Inflation Rate, Project
Cost, & Annual Returns
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Review the Results to Determine Payback Time
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Payback Time = (Year Cumulative Cash Flow is Positive) – Cumulative CF/Net Inflow
Ft
NPV Io
(1 r pt )t
Where
Ft = net cash flow for period t
r = required rate of return or discount rate
Io = initial cash investment
pt = inflation rate during period t Higher NPV values
are better!
Assume the following – A Company is considering 2
Projects requiring an initial investment of $10Mn
• Project A
– Cash Investment - $10Mn in the first year
– Returns (or Earnings) - $5Mn, $4Mn, $3.2Mn, $3Mn, and $2.5Mn over
the next 5 years for a total return of $17.7Mn
• Project B
– Cash Investment - $10Mn in the first year
– Returns (or Earnings) - $3Mn, $3.5Mn, $4.5Mn, $5.5Mn, and $6.5Mn
over the next 5 years for a total return of $23Mn
• The company’s Board of Directors expects a minimum of 16%
return on all projects.
• Which project is the best one for the board to invest their
cash?
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09/15/2020
Use Excel Template to Calculate NPV
09/15/2020 21
Template NPV Calculation
Therefore, Project B has Higher NPV ($4.2M) versus Project A’s NPV ($2.18M)
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What if the total returns were the same?
• Project A
– Cash Investment - $10Mn in the first year
– Returns (or Earnings) - $6.5Mn, $5.5Mn, $5Mn, $3.5Mn, and $2.5Mn
over the next 5 years for a total return of $23Mn
• Project B
– Cash Investment - $10Mn in the first year
– Returns (or Earnings) - $3Mn, $3.5Mn, $4.5Mn, $5.5Mn, and $6.5Mn
over the next 5 years for a total return of $23Mn
• The company’s Board of Directors expects a minimum of 16%
return on all projects.
• Which project is the best one for the board to invest their
cash?
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09/15/2020
Project A is Better Investment – Returns happen earlier
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09/15/2020
HOMEWORK REMINDERS
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Homework
• Read Chapters 4 & 6 Textbook
• Individual Homework Assignment (PM1) – due 9/17/19 EoD
(30 Points)
– Homework instructions on Canvas
– Exercises 3.21 (Discounted Payback), 3.25 (NPV), 5.3 (Work
Breakdown Structure – Next Class)
• Group Project - Start work on PT2 – Project Overview (Section
1.0) – due 9/19/19 (25 Points)
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QUESTIONS?
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