Download Weighting and Financial Models for Project Selection I) Nina is trying

Weighting and Financial Models for Project Selection
I) Nina is trying to decide which of the four shopping centers to locate her new boutique.
Some locations attract a higher class of clientele than others. Some are in the indoor mall,
some have a much greater consumer traffic volume than others, and rent varies
considerably from one location to another. Because of the nature of the store she has
decided that the class of the clientele is the most important consideration, the higher the
better. Following this she must pay attention to her expenses and rent is a major item,
probably 90% as important as the clientele. An indoor, temperature controlled mall is a
big help. However, for stores such as hers where 70% of sales are from passers-by
slowly strolling and window shopping. Thus, she rates it as 95% as important as rent.
Last, a higher shopping volume of shoppers means more potential sales, thus she rates
this factor 80% as important as rent. As an aid in visualizing her location alternatives, she
has constructed the following table. A ‘good’ is scored as 3, “fair” is 2 and “poor” is 1.
a) Use weighted scoring model to help Nina come to a decision.
Location
1
2
3
4
----------------------------------------------------------------------------------------------------------Class of clientele
Fair
Good
Poor
Good
Rent
Good
Fair
Poor
Good
Indoor Mall
Good
Poor
Good
Poor
Traffic Volume
Good
Fair
Good
Poor
b) Suppose Nina is able to negotiate a lower rent at location 3, and raise it’s ranking to
“good”. How does it affect the overall ranking of the four locations.
II) Use the concept of sensitivity analysis to identify the scope of potential improvement
in the project score that would result, were the project’s performance on a specific
criterion sufficiently improved.
Use a weighted scoring model to chose between three methods (A, B, C) of financing the
acquisition of a major competitor. The relative weights of each criterion are shown in the
following table as are the scores for each location on each criterion. A score of 1
represents unfavorable, 2 satisfactory and 3 favorable.
-----------------------------------------------------------------------------------------------------------Category
Weight
A
B
C
-----------------------------------------------------------------------------------------------------------Consulting cost
20
1
2
3
Acquisition Time
20
2
3
1
Disruption
10
2
1
3
Cultural Differences
10
3
3
2
Skill redundancies
10
2
1
1
Implementation risks
20
1
2
3
Infrastructure
10
2
2
2
a) What would your recommendation be if the weight for the implementation risks
went down to 10 and the weight of cultural differences went up to 25.
b) Suppose instead that method A received a score of 3 for implementation risks.
Would your recommendation change under these circumstances?
c) The vice president finance has looked at your original scoring model and feels
that tax considerations should be included in the model with a weight of 15. In
addition the V.P has scored the methods on tax consideration as follows: method
A received a score of 3, method B received a score of 2, and method C received a
score of 1. How would the additional information affect your recommendation?
III) Compare the use of a simple rating and weighted rating model for allocating a
project to the following 3 companiesMPD Company received proposals from 3 companies-Iron Butterfly contractors, Lowball
company, Modicum associates. The proposals were reviewed and rated by a group of
executives, facility managers, and operations experts at MPD’s Chicago and New York
offices. The proposals were rated on five criteria using a five point scale as followsCriteria
1
2
3
4
5
----------------------------------------------------------------------------------------------------------Technical solution
Bad
Poor
Adequate
Good
Excellent
Price
>1.8
1.6-1.8
1.4-1.6
1.2-1.4
<1.4
Project Organization Bad
Poor
Adequate
Good
Excellent
Likelihood of meeting cost Bad
Poor
Adequate
Good
Excellent
Reputation of contractor
Bad
Poor
Adequate
Good
Excellent
Simple Rating
The results of group assessment were as followsCriteria
Iron Butterfly
Lowball
Modicum
Technical solution
5
2
5
Price of contract
5
5
2
Project organization/mgt
5
3
4
Likelihood of meeting cost
4
3
5
Reputation of contractor
4
4
5
_______________________________________________________________________
Weighting criteria
Criteria
Weight
Technical solution approach
0.25
Price of contract
0.25
Project Organization and management
0.20
Likelihood f meeting cost
0.15
Reputation of contractor
0.15
Financial Models
A)
Two new internet site projects are proposed to a young start up company. Project A will
cost $ 250, 000 to implement and is expected to have annual cash flow of $ 75,000.
Project B will cost $150,000 to implement and should generate annual net cash flows of $
52,000.The company is very concerned about their cash flow. Using the payback period
which project is better from a cash flow standpoint?
B)
Sean, a new graduate at a telecommunications firm faces the following problem in his
first day at the firm: What is the average rate of return for a project that costs $200,000 to
implement and has an average annual profit of $30,000.
C)
A four year financial project has net cash flows of $20,000, $25,000, $30,000 and
$50,000 in the next four years. It will cost $75,000 to implement the project. If the
required rate of return is 0.2, conduct a discounted cash flow calculation to determine the
NPV.
D)
Calculate the Profitability Index for Problem C.
E)
Consider the following 2 projectsProject A
Initial value of investment
Rs.5,00,000
Present value of cash inflows
Rs.6,00,000
NPV
Rs.1,00,000
Which model will you chose to evaluate the 2 projects. Why?
Project B
Rs.11,00,000
Rs. 12,50,000
Rs. 1, 50,000
F)
Compare projects A and B using NPV method- assuming a discount rate of 11 percent
p.a.
Project A
Project B
Year
Cash outflow
Cash inflow
0
-.10,00,000
-10,00,000
1
8,00,000
4,00,000
2
6,00,000
4,00,000
3
3,00,000
4
3,00,000
5
2,00,000
________________________________________________________________________