Question: 1. Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have
1. Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have an annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have an annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?
- A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV.
- You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. The following chart shows the cash inform for each project. Which of the two projects would you fund if the decision were based only on financial information? Why?
| Omega Year | Inflow | Outflow | Netflow | Alpha Year | Inflow | Outflow | Netflow |
| Y0 | 0 | $ 225,000 | - 225,000 | Y0 | 0 | $300,000 | -300,000 |
| Y1 | 0 | 190,000 | - 190,000 | Y1 | $50,000 | 100,000 | - 50,000 |
| Y2 | $150,000 | 0 | 150,000 | Y2 | 150,000 | 0 | 150,000 |
| Y3 | 220,000 | 30,000 | 190,000 | Y3 | 250,000 | 50,000 | 200,000 |
| Y4 | 215,000 | 0 | 215,000 | Y4 | 250,000 | 0 | 250,000 |
| Y5 | 205,000 | 30,000 | 175,000 | Y5 | 200,000 | 50,000 | 150,000 |
| Y6 | 197,000 | 0 | 197,000 | Y6 | 180,000 | 0 | 180,000 |
| Y7 | 100,000 | 30,000 | 70,000 | Y7 | 120,000 | 30,000 | 90,000 |
| Total | 1,087,000 | 505,000 | 582,000 | Total | 1,200,000 | 530,000 | 670,000 |
4 The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects. Following are five projects under consideration.
- Using the scoring matrix in the following chart, which project would you rate highest? Lowest?
- If the weight for "Strong Sponsor" is changed from 2.0 to 5.0, will the project selection change? What are the three highest-weighted project scores with this new weight?
- Why is it important that the weights mirror critical strategic factors?
Project Screening Matrix
| Criteria | Strong sponsor | Supports business strategy | Urgency | 10% of sales from new products | Competition | Fill market gap | Weighted total |
| Weight | 2.0 | 5.0 | 4.0 | 3.0 | 1.0 | 3.0 |
|
| Project 1 | 9 | 5 | 2 | 0 | 2 | 5 |
|
| Project 2 | 3 | 7 | 2 | 0 | 5 | 1 |
|
| Project 3 | 6 | 8 | 2 | 3 | 6 | 8 |
|
| Project 4 | 1 | 0 | 5 | 10 | 6 | 9 |
|
| Project 5 | 3 | 10 | 10 | 1 | 8 | 0 |
|
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