Project Management the Managerial Process Ch 2

Topics: Net present value, Cash flow, Internal rate of return Pages: 5 (924 words) Published: February 20, 2011

1.You manage a hotel resort located on the South Beach on the Island of Kauai in Hawaii. You are shifting the focus of your resort from a traditional fun-in-the-sun destination to eco-tourism. (Eco-tourism focuses on environmental awareness and education.) How would you classify the following projects in terms of compliance, strategic, and operational? a.Convert the pool heating system from electrical to solar power. b.Build a 4-mile nature hiking trail.

c.Renovate the horse barn.
d.Replace the golf shop that accidentally burned down after being struck by lightning. e.Launch a new promotional campaign with Hawaii Airlines. f.Convert 12 adjacent acres into a wildlife preserve. g.Update all the bathrooms in condos that are 10 years or older. h.Change hotel brochures to reflect eco-tourism image. i.Test and revise disaster response plan.

j.Introduce wireless Internet service in café and lounge areas. How easy was it to classify these projects? What made some projects more difficult than others?

Most students classify the projects as follows:

Compliance:d., g., i.
Operational:a., c., j.
Strategic:b., e., f., h.

Most students claim it was not too difficult to classify the projects other than they had to make judgment calls given the limited information. In real life they would have such information. Debates occur around whether converting the heating system to solar polar was an operational necessity or to fit the eco-friendly image. Likewise, launching the promotional campaign with Hawaii Airlines would be considered strategic if it promoted the eco-tourism theme, otherwise it could be consider operational.

What do you think you now know that would be useful for managing projects at the hotel?

By classifying the projects, prioritizing is more easily done. Different selection criteria can be used for selecting strategic versus operational projects. Financially, senior management would have more information to divide the total money pie allocated to projects.

2.Two new software projects are proposed to a young, start-up company. The Alpha project will cost $150,000 to develop and is expected to have annual net cash flow of $40,000. The Beta project will cost $200,000 to develop and is expected to have annual net cash flow of $50,000. The company is very concerned about their cash flow. Using the payback period, which project is better from a cash flow standpoint? Why?

Payback = Investment / Annual Savings

Project Alpha: $150,000 / $40,000 = 3.75 years

Project Beta: $200,000 / $50,000 = 4.0 years

Project Alpha is the better payback.

3.A five-year project has a projected net cash flow of $15,000, $25,000, $30,000, $20,000, and $15,000 in the next five years. It will cost $50,000 to implement the project. If the required rate of return is 20 percent, conduct a discounted cash flow calculation to determine the NPV.

| |A | |2 |Exercise 2.3 | |3 |Net Present Value Example | |4 | | |5 | Project 2.3 | |Year 0 |

Since the NPV is positive, accept project.

4.You work for the 3T company, which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Below is the cash flow information for...
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