Download Project Selection Exercise

Advanced Project Management
Project Selection Exercise
Project Selection Exercise
Scenario
Edward J. Schwab’s governance committee has hired you to develop a
project selection process. In the past, the company tended to take on
too many proposed projects, causing the project teams to be
overwhelmed with demands that they struggled to deliver against.
Because of organizational growth, it is increasingly becoming difficult
to manage the complexity of the portfolio of projects. You will help the
company establish a semi-annual review process using a project
selection matrix based on the company’s major project criteria.
After extended discussions, you’ve helped the governance committee
to agree on the most important objectives for the company. You’ve
also helped them create a weighting factor for each objective, per the
following:
Criteria
Increase market share
Increase margin
Support culture of innovation
Increase public awareness
Weighting
Factor
5
4
3
1
Regardless of the technique they ultimately pick for project selection,
they want as much accuracy as possible without too much
sophistication.
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Advanced Project Management
Project Selection Exercise
The Projects
The organization is considering the following projects:
 Automated Teller project. Place specialized automated tellers in
major shopping areas across the country. The initial cost is $5 million
to install the machines in the highest value locations. The return is
expected to be $750,000 the first year; $500,000 per quarter over
the next two years; and $750,000 semi-annually after that. This
project has an IRR value of 5.5%.
 Financial Advisor project. Rapidly expand our base of community
financial advisors to service specific territories based on per-capita
income. Initial cost is $8 million to recruit and train the advisors. The
return is expected to be $1.5 million year one; $400,000 per quarter
over the next three years; and $750,000 semi-annually thereafter.
This project has an IRR value of -2.5%.
 Franchise project. Build small footprint franchises in strip malls.
Initial cost is $11 million for construction in targeted locations and
hiring employees. The return is expected to be $1 million for the first
six months followed by $2.5 million the second six months. The
second year should see $500,000 per quarter, with $600,000 per
quarter the third year and $3 million annually thereafter. This project
has an IRR value of 5%.
Project Ratings
Criteria
Increase market share
Increase margin
Support culture of innovative offerings
Increase public awareness
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ATM
5
6
9
8
Advisor Franchise
7
7
3
7
5
4
5
6
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Advanced Project Management
Project Selection Exercise
Questions
1. Create a Weighted Scoring matrix to rank each of the projects.
ATM
Advisor
Franchise
Criteria
Weight Score
Total
Score
Total
Score
Total
Market share
Margin
Innovation
Public awareness
Score
2. What are some strengths of using a Weighted Scoring Model to rank
projects? Weaknesses?
3. Rank each of the projects based on payback period.
ATM
Cumulative
Inflow
Advisor
Inflow
Cumulative
Franchise
Inflow
Cumulative
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Investment
4. What are some strengths & weaknesses of the payback period
method?
You will now use NPV to help the governance committee make a better
decision considering the time value of money. Assume an interest rate
of 5% and calculate the NPV over 5 years for each project, allowing
the committee to have comparable information for evaluating the
projects. Use these to ease your calculations of PV:
Year
Year
Year
Year
Year
1:
2:
3:
4:
5:
(1
(1
(1
(1
(1
+
+
+
+
+
.05)1
.05)2
.05)3
.05)4
.05)5
=
=
=
=
=
1.0500
1.1025
1.1576
1.2155
1.2763
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Advanced Project Management
Project Selection Exercise
5. Which of the three projects provides the best NPV (you can use the table
below)? Rank them.
Year
1
2
3
4
5
Total
ATM
Inflows
PV
Advisor
Inflows
PV
Franchise
Inflows
PV
Cost
NPV
6. What are some advantages and disadvantages of using NPV to rank and
select projects?
7. Rank the projects based on IRR.
8. What financial return method would you recommend for this
organization? Why?
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