450- to 1,350-word paper discussing project cost and cost classifications.
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project_proposal_wk_3.docxRunning Head: PROJECT PROPOSAL
Project Proposal 6
Week 3 Assignment
Write no more than a 450- to 1,350-word proposal which applies the methods for calculating a project’s viability.
· Ford Motor Co.
Review the organization’s annual report by researching your chosen organization.
Write a proposal advising the selected organization on obtaining funding and managing a project budget, to purchase equipment to increase worker safety. The initial investment is $25M and the yearly cash inflows are as follows:
· Year 2 – $5M
· Year 3 – $10M
· Year 4 – $15M
· Year 5 – $12M
Assume all cash flows are at the beginning of the period and a discount rate of 10%.
Include the following information in your project proposal:
· Define business needs in an overivew of the project, including high-level deliverables to solve the problem.
· Describe the net present value (NPV), internal rate of return (IRR), profitability index, and payback methodologies for calculating the projects viability. Examine the strengths and weakness of each methodology.
· Calculate NPV, IRR, profitability index, and payback method. Explain the rationale for accepting or rejecting the project based on its financial viability.
After reviewing the Ford Motor Company’s annual report, a proposal is created to advise the company on getting funding and managing the budget for the project to buy equipment to increase the safety of the workers. The preliminary investment is $25 million and the yearly inflows of cash are $5 million for the second year, $10 million for the third year, $15 million for the fourth year and $12 million for the fifth year (Yescombe, 2013). The flows of cash are at the start of the period and at a 10% discount rate. The business needs have been defined, inclusive of high-level deliverables to enable problem solving. The NPV, IRR, profitability index, as well as methodologies for payback, are calculated to come up with the project’s viability. The weaknesses and strengths are identified for every methodology. After identifying the calculations, the project gets rejected or accepted, and the rationale for the decision is explained (Callahan et al., 2007).
Business needs and Deliverables
Ford Motor Company has identified that it needs to increase its worker safety. To achieve this, the company has decided to buy some equipment. There are several issues surrounding safety like legal issues, insurance premiums, health and morale. The starting cost for safety improvement will pay off at last by money, saving and improve the quality of the mentioned areas. The deliverables to solve the problems throughout the project include a definition of the problem as well as project scope, measuring the present performance and then have the problem isolated, select the right equipment as well as control to make sure that the set target is met using the new equipment.
NPV, IRR, Payback Methodology, Profitability Index: Weaknesses and Strengths.
The viability of this project must be defined and the weaknesses and strengths of every methodology identified. In order to do this, IRR, NPV, payback methodology and profitability index must be calculated. NPV is the comparison of the current value of payoffs, less the current value of the project’s costs. If the payoffs’ current value exceeds the costs’ present value, then the project creates value. NPV strength is that it does a measurement of the total profit, clearly contrasting the project. Its weakness is that the minimum return rate radically changes results (Yescombe, 2013). IRR calculation gets compared to the required rate of return to help determine the project’s viability. Its strength is that it is easy to compare the yearly interest rate to the capital investment rates cost. IRR weakness is that it requires manual calculation which is hard and gives misleading results. The profitability index makes a comparison of the benefits and costs of the project. Its strength is that it unveils the initial commitment that is up front to be made to finish the project. Its weakness is that its measure is not understood easily. The payback method finds the time was taken to recover the initial investment. It is not complicated to calculate, but it overlooks the long-term payoffs (Callahan et al., 2007).
Calculations and rejection or acceptance
The calculations done to define the viability of the project are The NPV=$6.61M, Profitability index=0.26, The IRR=21.05%. The payback gets doubled by the fourth year and by the fifth year; the payback gets to $42M. From the results obtained from the calculations, the project can be said to be feasible. It is viable because it surpasses the discount rate of 10% and investment’s return gets doubled by the fourth year. The project has a payback return of $42M by the fifth year. The project is accepted and viable (Callahan et al., 2007).
Conclusion
Ford Motor Company is in view of buying equipment to improve the company’s safety. Before the project’s acceptance, the business deliverables and needs are defined. Next IRR, NPV, payback methodology and profitability index get defined along with their weaknesses and strengths. Lastly, the calculations are done, and the project’s viability decided. Based on the results, the project is accepted and viable (Callahan et al., 2007).
The calculations are as follows:
Interest Rate 10%
Year1 2 3 4 5
Cash flows -25000 5000 100000 15000
NPV $7,275.80
IRR 21.05%
Index 1.29
Payback Period 2.67
Year
Times to rebate 1 2 3 4 5
(Flows at the start of year) 0 1 2 3 4
Present values of year. ($25,000.00) $4,545.45 $8,264.46 $11,269.72 $8,196.16
Sum of present values of every year 7,275.80 It verifies the value of NPV calculated above.
References Callahan, K.R., Stetz, G.S., & Brooks, L.M. (2007). Project management accounting. Hoboken, NJ: John Wiley & Sons, Inc. Yescombe E. R. (2013). Principles of Project Finance. New York: Academic Press.
