A project manager is often tasked with reviewing different projects and choosing which project is best to pursue. To accomplish this task, a project manager would use different methods for pr
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A project manager is often tasked with reviewing different projects and choosing which project is best to pursue. To accomplish this task, a project manager would use different methods for project selection.
This assignment allows you to work through a few of these methods using Microsoft Excel.
- Download the Microsoft Excel template Download Microsoft Excel template to use for this assignment.
- Review the information provided in the Excel spreadsheet for choosing among the four project alternatives (labeled A, B, C, and D). Each has been assessed according to four criteria:
- Payoff potential
- Lack of risk
- Safety
- Competitive advantage
- Construct a project checklist model, using the Excel template, for screening these four alternatives. Based on your model, which project is the best choice for your selection? Why? Which is the worst? Why?
- Create Scoring Model 1. Suppose the same information from the checklist in the first problem was supplemented by importance weights for each of the four assessment criteria, where 1 = low importance and 4 = high importance (see weights in the template). Assume, too, that evaluations of high received a score of 3, medium 2, and low 1. Create a scoring model (using the Excel template) and reassess the four project choices (A, B, C, and D). Now which project alternative is the best? Why?
- Create Scoring Model 2. Now assume that for Problem 3, the importance weight is altered (see weights in the template). How does this new information alter your decision? Which project now looks most attractive? Why? Base your response by filling in the graph within the Excel template.
- Determine Discount Payback. Your company is seriously considering investing in a new project opportunity, but cash flow is tight. Top management is concerned about how long it will take for this new project to pay back the initial investment of $50,000. You have determined that the project should generate inflows of $30,000, $30,000, $40,000, $25,000, and $15,000 for the next five years. Your firm’s required rate of return (or discount rate) is 15%. In what year are we able to pay back the initial investment? Respond based on filling in the graph within the Excel template.
- Determine Net Present Value. Assume that your firm wants to choose between two project options:
- Project A: $500,000 invested today will yield an expected income stream of $150,000 per year for 5 years, starting in Year 1.
- Project B: an initial investment of $400,000 is expected to produce this revenue stream: Year 1 = 0, Year 2 = $50,000, Year 3 = $200,000, Year 4 = $300,000, and Year 5 = $200,000.
Assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. Which is the better investment? Why? Respond based on filling in the graph within the Excel template.
Sheet1
| PMT472L Week 1 Assignment Template | V2 | |||||||||
| Instructions: Fill in the only the yellow fields: | ||||||||||
| 1. Checklist: | Use an "X" to designate the appropriate performance column. | |||||||||
| Performance on Criteria | ||||||||||
| Project A is rated: | Project | Criteria | High | Med | Low | |||||
| Payoff potential | high | |||||||||
| Lack of risk | low | |||||||||
| Safety | high | |||||||||
| Competitive advantage | medium | |||||||||
| Project B is rated: | ||||||||||
| Payoff potential | low | |||||||||
| Lack of risk | medium | |||||||||
| Safety | medium | |||||||||
| Competitive advantage | medium | |||||||||
| Project C is rated: | ||||||||||
| Payoff potential | medium | |||||||||
| Lack of risk | medium | |||||||||
| Safety | low | |||||||||
| Competitive advantage | low | |||||||||
| Project D is rated: | What is the best choice? | |||||||||
| Payoff potential | high | Why? | ||||||||
| Lack of risk | high | |||||||||
| Safety | medium | Which is the worst choice? | ||||||||
| Competitive advantage | medium | Why? | ||||||||
| 2. Scoring Model # 1 | Scoring Model #1 | Importance Weight | Score | Weighted Score | ||||||
| Project | Criteria | |||||||||
| Importance Weight: | ||||||||||
| Payoff Potential | 4 | |||||||||
| Lack of Risk | 3 | |||||||||
| Safety | 1 | |||||||||
| Competitive Advantage | 3 | Total Score | ||||||||
| Criteria Score: | ||||||||||
| High | 3 | |||||||||
| Medium | 2 | |||||||||
| Low | 1 | Total Score | ||||||||
| Tip: Weighted Score = Importance Weight x Score | ||||||||||
| Total Score | ||||||||||
| Total Score | ||||||||||
| What is the best choice? | ||||||||||
| Why? | ||||||||||
| 3. Scoring Model # 2 | Scoring Model #2 | Importance Weight | Score | Weighted Score | ||||||
| Project | Criteria | |||||||||
| Importance Weight: | ||||||||||
| Payoff Potential | 1 | |||||||||
| Lack of Risk | 1 | |||||||||
| Safety | 4 | |||||||||
| Competitive Advantage | 2 | Total Score | ||||||||
| Criteria Score: | ||||||||||
| High | 3 | |||||||||
| Medium | 2 | |||||||||
| Low | 1 | Total Score | ||||||||
| Tip: Weighted Score = Importance Weight x Score | ||||||||||
| Total Score | ||||||||||
| Total Score | ||||||||||
| What is the best choice? | ||||||||||
| Why? | ||||||||||
| 4. Discount Payback | Set up a discounted cash flow table to calculate the time needed to pay back the initial $50,000 investment. | |||||||||
| Tips: | Discount Factor | New Inflows | Cumulative Cash Flow | |||||||
| Discount Rate = 15% | Year | Cash Flow | ||||||||
| Discount factor = 1/(1+r)t | 0 | (50,000) | 1.00 | (50,000) | (50,000) | |||||
| r = discount rate and t = year | 1 | 30,000 | ||||||||
| The breakeven year is the last year that the cumulative cash flow is negative. | 2 | 30,000 | ||||||||
| 3 | 40,000 | |||||||||
| 4 | 25,000 | |||||||||
| 5 | 15,000 | 0.50 | 7,500 | 47,050 | ||||||
| In what year will we reach a breakeven point? | ||||||||||
| 5. Net Present Value | ||||||||||
| • Project A: $500,000 invested today will yield an expected income stream of $150,000 per year for 5 years, starting in Year 1. | ||||||||||
| • Project B: Investment of $400,000 is expected to produce this revenue stream: Year 1 = 0, Year 2 = $50,000, Year 3 = $200,000, Year 4 = $300,000, and Year 5 = $200,000. | ||||||||||
| Assume that a required rate of return for your company is 10% and that inflation is expected to remain steady at 3% for the life of the project. | ||||||||||
| Tips: | Project A | Discount Factor | New Inflows | Cumulative Cash Flow | ||||||
| Discount Rate = Rate of Return + Inflation | Year | Cash Flow | ||||||||
| Discount factor = 1/(1+r)t | 0 | (500,000) | 1.00 | (500,000) | (500,000) | |||||
| r = discount rate and t = year | 1 | 150,000 | ||||||||
| 2 | 150,000 | |||||||||
| 3 | 150,000 | |||||||||
| 4 | 150,000 | |||||||||
| 5 | 150,000 | < NPV Total | ||||||||
| Project B | Discount Factor | New Inflows | Cumulative Cash Flow | |||||||
| Year | Cash Flow | |||||||||
| 0 | (400,000) | 1.00 | (400,000) | (400,000) | ||||||
| 1 | – 0 | |||||||||
| 2 | 50,000 | |||||||||
| 3 | 200,000 | |||||||||
| 4 | 300,000 | |||||||||
| 5 | 200,000 | < NPV Total | ||||||||
| Which is the better Investment? | ||||||||||
| Why? | ||||||||||
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