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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. www.i-leadonline.com/eLearningHome.asp 1 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 www.i-leadonline.com/eLearningHome.asp ATM 5 6 9 8 Advisor Franchise 7 7 3 7 5 4 5 6 2 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 www.i-leadonline.com/eLearningHome.asp 3 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? www.i-leadonline.com/eLearningHome.asp 4