GROUP 2
Jihad Alfalaneh Malathi Govind Gandhi Suresh Babu Nidhin Rajan Shensi Alifiya Lilamwala Adel Owhaib Sowmia Rangaraj
CASE SYNOPSIS
This presentation will examine Case Study 3.2 which is about project selection at Nova Western. These are the major points of the case: Phyllis Henry (the senior manager) has assigned a team to evaluate two projects (Project Janus and Project Gemini) and determine which projects should be taken on by on Nova Western. One team was opted the scoring method (non-financial method) and the other team went with the net present value (NPV) method (financial method). Each method produced different results so Phyllis needs more help in explaining the disagreement of opinion from one technique to the next and deciding which project to elect.
PROJECT SELECTION
Project Selection is a process to assess each project idea and select the project with the highest priority. Selection of projects is based on: Benefits: A measure of the positive outcomes of the project. These are often described as "the reasons why you are undertaking the project". The types of benefits of eradication projects include: Biodiversity Economic Social and cultural Fulfilling commitments made as part of national, regional or international plans and agreements. Feasibility: A measure of the likelihood of the project being a success, i.e. achieving its objectives. Projects vary greatly in complexity and risk. By considering feasibility when selecting projects it means the easiest projects with the greatest benefits are given priority.
require changes. It must, for example, allow for adjustments due to changes in exchange rates, tax laws, building codes, and so forth. Ease of Use: A model must be simple enough to be used by people in all areas of the organization, both those in specific project roles and those in related functional positions. Cost: The screening model should be cost effective. A selection approach that is expensive to use in terms of either time or money is likely to have the worst possible effect: causing organizational members to avoid using it because of the excessive cost of employing the screening model.
QUESTION 1
Phyllis has called you into her office to help her make sense of the contradictions in project evaluation. How would you explain the reasons for this divergence of opinion from one technique to the next? What are the strengths and weaknesses of each screening method?
method The results of the two selection methods performed by the company, specifically the scoring model and the NPV analysis, have clearly yielded opposite outcomes. The scoring model, a non-financial screening method, suggests that Project Gemini is the right choice for the next new project. On the other hand, the NPV Analysis, a financial screening method, suggests the opposite. It is not uncommon for financial and non-financial screening methods to yield competing information. The next slides will show the strengths and weaknesses of the screening methods that have been mentioned in the case as well as the other alternative methods that have been suggested by the group. This table will help the company to know which method/s is/are appropriate to use to make the wisest decision.
NPV ANALYSIS
http://www.youtube.com/watch?v=7FsGpi_W9XI The difference between the present value of cash inflows and the present values of cash outflows. It is used in capital budgeting to analyze the profitability of an investment. Advantages Easy method to execute Ensures that the company will invest in a project that will definitely generate profit. Disadvantages Ignores probabilities and risk Assumes that financial projections are accurate Assumes that strategic considerations are irrelevant Fails to deal with constrained resources Difficulty in making accurate long-term predictions
Year 2 =
Year 3 = Year 4 = Year 5 =
$ 100,000
$ 100,000 $ 200,000 $ 75,000
SCORING MODEL
The scoring method involves ranking each criterion according to its relative importance. It is a formula that assigns points based on known information to predict an unknown future outcome. Advantages Appropriate to use in terms of knowing whether a project is aligned with the companys strategic goals or not Easy to use and to comprehend as well Disadvantages The rating scale (1 3 or above) that is used is not very accurate There is no certainty whether the link between the selected/chosen criteria and the companys strategic goals are 100% aligned or not
SCORING MODEL
Project Janus Project Gemini
Category
1. Strategic Fit 2. Probability of technical success 3.Financial risk 4.Potential profit 5.Strategic Leverage
Import ance
3 2 2 2
Score
Weighted Score
6 4
Import ance 3 2 3 2
Score
Weighted Score 9 4
2 3 1
1 3 1
2 9 1 Score =22
4.Potential profit
5.Strategic Leverage
3
1
3
2
9
2 Score =28
QUESTION 2
Choose the project that you feel, based on the above analysis, Nova Western should select. Defend your choice.
The best way to look which project is better to select is to know how long
it will take for the project to pay back its initial budget and begin to generate positive cash flow for the company.
Taking into account the rationale behind the NPV Analysis that it
recognizes the time value of a money (a $ received today is worth more than a $ received tomorrow), it measures the projects true profitability
Project Janus is the best project since it offers a higher net present value
Based on the computations and analysis above, although Project Janus has
higher NPV, its payback period is longer than Project Gemini. So, if the firm does not wish to tie its money up too long, Gemini might be a reasonable alternative.
Hence, among the three project selection methods, two of them support
QUESTION 3
What does the above case suggest to you about the use of project selection methods in organizations? How would you resolve the contradictions found in this example?
consistency from method to method is questionable. One simple solution to this case might be to use the results of the discounted cash flow analysis as an additional factor in the weighted scoring model, whereby net present value becomes an additional selection criterion to consider along with the other factors already listed. Based on the case, Phyllis staff constructed two projection selection methods in order to determine which project they have to support: one was financial and the other qualitative. However, there were problems in the results because it yielded different findings. Project Gemini was the best alternative in the scoring model while Project Janus has the higher NPV. From this conflict, we as the group suggested that it would be better to use another selection criterion so that to avoid biases and it would be easier for the top management to decide the best project that would give positive impacts in the company.
CONCLUSION
Project Selection is one of the tough decisions that an organization has to
deal with since many resources are at stake, especially money. In choosing the right project to execute, it is best to always consider not only the possible revenue that it will generate in the future but also its relative importance to the market and to the company itself. In choosing the best project, there will be at least three evaluations to conduct by the top management in order to avoid biases in the organization. In choosing projects for organizations, choose the projects that will have long-term benefits.