Assignmnet 1
MSA-674
Assignment-I
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?
Answer:-
Payback = Investment / Annual Savings
Project Alpha
Project Beta
Develop cost(Investment)
$150,000
$200,000
Annual net cash flow
$40,000
$50,000
Payback
3.75 years
4.0 years
Project Alpha is the better from a cash flow standpoint, as it returns investment in 3.75 years whereas project Beta pays off in 4 years. But both can be acceptable since both return the initial investment in less than five years.
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?
Answer: - Referred (Exhibit 2.3) from the textbook.
Year 1
Year 2
Year 3
Year 4
Year 5
Required ROI
20%
Outflows
-$50,000
Inflows
$15,000
$25,000
$30,000
$20,000
$15,000
Total return in 5 years = $105,000
NPV formula in Excel* = -$50,000 + NPV (20%, $105,000)
NPV = $12,895
5. You are the head of the project selection team at SIMSOX. Your team is considering three different projects. Based on past history, SIMSOX expects at least a rate of return of 20 percent. Your financial advisors predict inflation to remain at 3 percent into the foreseeable future. Given the following information for each project, which one should be SIMSOX first priority? Should SIMSOX fund any of the other projects? If so, what should be the order of priority based on return on investment?
Answer:-
Project Dust Devils
Year
Outflows
Assignment-I
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?
Answer:-
Payback = Investment / Annual Savings
Project Alpha
Project Beta
Develop cost(Investment)
$150,000
$200,000
Annual net cash flow
$40,000
$50,000
Payback
3.75 years
4.0 years
Project Alpha is the better from a cash flow standpoint, as it returns investment in 3.75 years whereas project Beta pays off in 4 years. But both can be acceptable since both return the initial investment in less than five years.
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?
Answer: - Referred (Exhibit 2.3) from the textbook.
Year 1
Year 2
Year 3
Year 4
Year 5
Required ROI
20%
Outflows
-$50,000
Inflows
$15,000
$25,000
$30,000
$20,000
$15,000
Total return in 5 years = $105,000
NPV formula in Excel* = -$50,000 + NPV (20%, $105,000)
NPV = $12,895
5. You are the head of the project selection team at SIMSOX. Your team is considering three different projects. Based on past history, SIMSOX expects at least a rate of return of 20 percent. Your financial advisors predict inflation to remain at 3 percent into the foreseeable future. Given the following information for each project, which one should be SIMSOX first priority? Should SIMSOX fund any of the other projects? If so, what should be the order of priority based on return on investment?
Answer:-
Project Dust Devils
Year
Outflows