Project Selection Exercise: Scenario
Project Selection Exercise: Scenario
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 meet. 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 have helped the governance committee agree on the most important objectives for
the company. You have also helped them create a weighting factor for each objective, per the following:
CRITERIA WEIGHTING
FACTOR
Increase market share 5
Increase margin 4
Support culture of innovation 3
Increase public awareness 1
Regardless of the technique they ultimately pick for project selection, they want as much accuracy as possible
without too much sophistication.
1
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 AED 5 million to install the machines in the highest value locations. The return is expected to be
AED 750,000 the first year; AED 500,000 per quarter over the next two years; and AED 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 AED 8 million to recruit and train the advisors. The return is
expected to be AED 1.5 million year one; AED 400,000 per quarter over the next three years; and AED 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 AED 11 million for construction
in targeted locations and hiring employees. The return is expected to be AED 1 million for the first six months
followed by AED 2.5 million the second six months. The second year should see AED 500,000 per quarter, with
AED 600,000 per quarter the third year and AED 3 million annually thereafter. This project has an IRR value of
5%.
Project Ratings
CRITERIA ATM ADVISO FRANCHISE
R
Increase market share 5 7 7
Increase margin 6 3 7
Support culture of innovative offerings 9 5 4
Increase public awareness 8 5 6
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Questions
1. Create a Weighted Scoring matrix to rank each of the projects.
2. What are some strengths of using a Weighted Scoring Model to rank projects? Weaknesses?
Strength: Allow multiple criteria • Structurally simple • Direct reflection of managerial policy • Easily altered
• Allow for more important factors • Allow easy sensitivity analysis
Weakness: Relative measure • Linear in form • Can have large number of criteria • Unweighted models
assume equal importance
Investment 3 2 1
4. What are some strengths & weaknesses of the payback period method?
3
It gives more importance on liquidity for making decision about the investment proposals.
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:
4
Year 1: (1 + .05)1 = 1.0500
5. Which of the three projects provides the best NPV (you can use the table below)? Rank them.
6. What are some advantages and disadvantages of using NPV to rank and select projects?
Advantages:
5
Disadvantages:
2. Franchise project
8. What financial return method would you recommend for this organization? Why?
In my opinion NPV would be the most appropriate since it consider the time value of money and it would
help maximize the value of the firm.