In the Nova Western, Inc case study the company is deciding on which new product line to go with for their next project. The two independent groups working on the project screening process have come up with the top two prospects however each report yielded different results. One evaluation team used the weighted scoring model while the other team used the NPV model. Phyllis needs our help to figure out the contradictory findings.As mentioned above, depending on your objectives or goals within your origination is going to determine which model you chose as your tool of chose. Nova Western used two teams and each team used a different method. One team used the more simple nonnumeric method while the other team used a more complex numeric mode.
To make the most informed decision the IRRs and payback periods of the projects should be compared in conjunction with the NPVs of the two projects. The NPV analysis of the two projects under consideration indicates that the MMDC Project is the better of the two projects.
The factors that group two considers important to the Toyota Motor Manufacturing Canada will be using the weighted scoring model which is a system used to document decisions or solutions for management to make informed decisions taking into account all available options when it comes to resource allocation, (Carroll, Farr & Trainor, 2008).
2. Static model: Once the decision to go for the project has been made, possible future changes are not taken into account anymore. It does not account for future decisions (such as hold or abandon a part of the project) based on better information or change in scenario. The NPV of the project should be split in multiple projects whereby the decision is postponed until more information is known about a particular part of the project
In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this
Net Present Value (NPV) calculates the sum of discounted future cash flows and subtracting that amount with the initial investment of the project. If the NPV of a project results in a positive number, the project should be undertaken. It is the most widely used method of capital budgeting. While discount rate used in NPV is typically the organization’s WACC, higher risk projects would not be factored in into the calculation. In this case, higher discount rate should be used. An example of this is when the project to be undertaken happens to be an international project where the country risk is high. Therefore, NPV is usually used to determine if a project will add value to the company. Another disadvantage of NPV method is that it is fairly complex compared to the other methods discussed earlier.
Account for time. Time is money. We prefer to receive cash sooner rather than later. Use net present value as a technique to summarize the quantitative attractiveness of the project. Quite simply, NPV can be interpreted as the amount by which the market
Q7. How did the new project selection process handle non-numeric type project? risk? How did this new process alter new project proposals at hp?
I was immediately intrigued from the beginning of Food, Inc. There was interesting and valuable information brought up during the film. Many people do not think about where their food comes from. I believe that if people were to know where their food comes from, they would not want to eat it. There are 47,000 products at a grocery store. But, Food, Inc. implies that this is in fact an illusion because all of them are made with the same crops. The fact that there are only a few multi-national corporations that control all of the crops and meat production is a huge surprise. I believe that each person in society would be absolutely shocked if they were to watch this documentary.
The first project proposal is Match My Doll Clothing line expansion consisted of expanding matching doll and child’s clothing and accessories. The second project proposal is Design Your Own Doll by creating customizable “one of a kind” doll features through the company’s website. The project selection criteria would base on quantitative and qualitative analysis. The quantitative analysis would base on the evaluation of discounting cash flow forecasts to determining the Net Present Value (NPV), Internal Rate of Return (IRR), and the Payback period of each proposed project. The qualitative analysis would include the potential project value of the company’s overall strategy, innovation, key project risks, and the project interdependencies to the whole company.
The four measures were net present value (NPV), internal rate of return (IRR), the payback period and increases in earnings per share (EPS). Other strategic factors must be considered that are not reflected in the financial tests. James Fawn and his ICG analyst team must decide which project is the best value for the short-term and the long-term. Utilizing these financial hurdles and contemplating other strategic factors, Victoria Chemicals will choose the project that will give the firm the most value.
2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.
We might also want to take competitor actions into account and how these may affect our decision making (e.g. perhaps first mover advantages in the design your own doll project might be very positive, but if a competitor introduces a similar value proposition between the investment decision and market introduction (2 years later), this may have a negative impact on the projects profitability)
Evaluating the risks, calculating the probability of success, and factoring in the projected profit from sales will provide a clearer NPV to be compared with other projects in the
Question 1. What project selection method described in the chapter will ABI probably employ for this proposal? Answer According to the description, the project selection method is profitability of numeric model. We might see the points from the business strategy 1) Bid only on good margin products that have the potential for maintaining their margins over a long term. 2) Pursue only new products. 3) Utilize the most advanced technology in new projects. “ project champion” approach to innovation and creativity. no more than 480 employees. 4) Foster the
Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.