Help. Project Management.

AGEC 480

Homework #2

You will enter your answers via a quiz format

1. Consider the following information in choosing among the four project alternatives below (labeled A, B, C, and D). Each has been assessed according to four criteria:

·

· Payoff potential

· Lack of risk

· Safety

· Competitive advantage

Project A is rated:

Payoff potential high

Lack of risk low

Safety high

Competitive advantage medium

Project B is rated:

Payoff potential low

Lack of risk medium

Safety medium

Competitive advantage medium

Project C is rated:

Payoff potential medium

Lack of risk medium

Safety low

Competitive advantage low

Project D is rated:

Payoff potential high

Lack of risk high

Safety medium

Competitive advantage medium

Construct a checklist model for the above projects. Which project is the best choice? Which project is the worst choice? Be able to explain your answers.

2. Suppose the information in Problem 1 was changed by adding importance weights for each of the four assessment criteria as follows; where 1 = low importance and 4 = high importance:

Assessment Criteria: Importance Weights

· Payoff potential 4

· Lack of risk 3

· Safety 1

· Competitive advantage 3

Also assume that evaluations of high receive a score of 3, medium 2, and low 1. Create a project scoring model and reassess the four project choices (A, B, C, and D). Now which project alternative the best? Why?

3. Assume that your firm wants to choose between two project options:

· Project A offers the following opportunity: $500,000 invested today will yield an expected income stream of $150,000 per year for 5 years.

· Project B requires an initial investment of $400,000, but its expected revenue stream is: Year 1 = 0, Year 2 = $50,000, Year 3 = $200,000, Year 4 = $300,000, and Year 5 = $200,000.

Assume that a required rate of return for your company is 10% and that inflation is currently expected to remain steady at 3% for the life of the project. Which is the better investment? Why?

4. Your Vice President for MIS informs you that she has researched the possibility of automating your organization’s order-entry system. She has projected that the new system will reduce labor costs by $30,000 each year over the next five years. The purchase price (including installation and testing) of the new system is $110,000.

What is the Net Present Value of this investment if the discount rate is 10% per year?