Project Manager - Net Present Value Decision Making - For the Company you're following!

When determining whether or not to proceed on a project, remember, Net Present Value (NPV) is the difference between the market value of the project and its cost:

As a Project Manager: You will possibly propose a project based on your analysis:

1. Your task is to Create numbers for a hypothetical 3-year project (new factory, building, new product roll-out, etc.) for the company you have chosen (IMPORTANT)..
2. Think about what your company may need to expand...and list in detail what project(s) you are considering for your company.
3. Determine if your 3-year project that your chosen company is considering will have a NPV > 0. Calculate (and SHOW CALCULATIONS) by ONLY using ONLY 1 method (formula, Excel, Calculator, etc.). See method below on a hypothetical Tesla example below.

IF NPV > 0, accept project.

Please see Chapter 8 slides for examples.

Use your own numbers for estimates and follow the formula from the chapter.

EXAMPLE BY PROFESSOR for a Tesla Expansion Project:

(Hypothetical case)

Demand for Teslas electric vehicles has been skyrocketing, and Teslas management is considering breaking ground with a new manufacturing plant in Tennessee, especially that Tennessee is granting tax breaks to new firms that will employ over 2,000 newly recruited employees. This new plant is poised to build as follows:

• 70,000 Model X and Model E cars by Year 1 end
• 80,000 cars by Year 2 end
• 85,000 cars by Year 3 end
• As of year 4, Tesla will have to shut this plant down or refurbish it, as technology would have fully morphed by then. So no cash flow at all in year 4

Accordingly a Finance manager and a Project manager have to check if this investment in a new plant is feasible, using the NPV method. Remember if NPV > 0, the project would be, a priori, desirable.

Given that the initial investment in the plant is $2,000,000,000 (two billion dollars not unreasonable) and the required rate of return for Tesla is 14%, and given that Tesla would make $10,000 net (after tax and after expenses) profit year in year out per car sold, heres how the NPV would be calculated.

The cash flow figures would look like this:

Year 0 = initial investment = -$2,000,000,000

Year 1, 70,000 cars at $10,000 net profit each --> Cash flow Year 1 = 70,000 cars x $10,000 profit / car = $700,000,000

Year 2 at 80,000 x $10,000 = $800,000,000

Year 3 at 85,000 x $10,000 = $850,000,000

Year 4 = $0

So,

Year 0: -2,000,000,000

Year 1: +700,000,000

Year 2: +800,000,000

Year 3: +850,000,000

Method 1: through formula

NPV = -2,000,000,000 + 700,000,000/(1+0.14)¹ + 800,000,000/(1+0.14)² + 850,000,000/(1+.14)³

NPV = -$196,665,101

Method 2: Excel

NPV(0.14,B3,B4,B5)-2000000000 = NPV(0.14,700000000,800000000,850000000)-2000000000 = -$196,665,101

Method 3: Calculator

(If you intend on BA II Plus, please see tutorial video)

NPV < 0; Tesla should disapprove of this project to go forward based on this scenario! (Either the initial investment should be LESS, the expected car output should be more, OR the discount rate needed to be lower, for the project to pass the NPV hurdle).

Answer the following:

1. Will upper management accept or not accept your project? Explain why or why not.