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PROJECT RANKING

TRINE UNIVERSITY

NEW PRODUCT DEVELOPMENT

FINAL PROJECT RANKING REPORT

BY:-

PRAMUKH SHEKAR

CHINTHAN

SANDEEP

SIDDARTHA

WASI

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PROJECT RANKING

CONTENTS

Scenario 1.3-5

Scenario 2..5-7

Scenario 3..7-10

Scenario 410-11

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Net Present Value (NPV) and its Strength and Weaknesses:

Net Present Value (NPV) is defined as the difference between the present value of cash inflows

and the present values of cash outflows; it is used to analyze the profit of presented project or

investment.

Strengths of NPV:

NPV takes into account the future dollar value is less worth than todays dollar, the cash

flows are discounted by another period of capital cost periodically


It analyses the value of an investment
NPV takes into consideration the cost of capital and the risk inherent in making

projections about the future.

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Weaknesses of NPV:

The firms cost of capital requires guesswork and analyzation based on which high or

low assumptions of cost of capital will result in suboptimal or too good investments

respectively.
It cannot be implemented for comparison of two projects of different size.

The calculations are shown below for the above scenario 1

NPV= Present value developmental cost commercialization cost.

Case1:zulu NPV= 30- 3- 2= 25

Case 2:Alpha NPV=2-2-1= -1

Case 3:Tango: NPV= 4 0.5- 0.75= 2.75

Case 4:Beta: NPV= 5 3 2 = 0

Case 5:Sierra: NPV=42- 4.5- 8 = 29.5

Case 6: Echo: NPV=10- 7-5 = -2

Case 7:Romeo: NPV=27- 4-2= 21

Case 8:Oscar NPV = 8-1-0.5= 6.5

Case 9:Lima: NPV=69-10-5= 54

In scenario 1, based on the data provided we use the formula of NPV as the difference of

Present value, Development cost and Commercialization cost to calculate NPV of the 9 projects

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given with their present value and costs which vary accordingly. We thus calculate NPV of each

project and the next step involves ranking the project.

Ranking is done based on starting from highest NPV and follows accordingly, hence in our case

Limas project got highest NPV as 54, so we rank her 1 and we decide to Go. The values with

negative NPV are decided as Kill and the rest are ranked and decided to Go descending from

the highest NPV. In our case we rejected Echos and Alphas and decided to Kill as their NPV

were negative that is -2 and -1 respectively.

NPV PI is defined as the analyzation of the profitability of the project based on NPVand

development cost.

NPV PI=NPV/development cost

NPV PI is useful for analyzing the project based on its financial performance.

NET PRESENT VALUE PROFITABILITY INDEX AND NET PRESENT VALUE:

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Future expected cash flows are discounted in net present value.


Net present value does not generate the account on income generated to forecast the

future state of the project.

STRENGTHS OF NET PRESENT VALUE PROFITABILITY INDEX

It uses a process of PI or > 1 to determine the kill/go process.


Like NPV, NPV PI also takes into account the Idea that dollar is worth more than that of

years later.

WEAKNESSES OF NET PRESENT VALUE PROFITABILITY INDEX

Two projects that are mutually exclusive would not be considered as the PI process.
Works on the estimate of cash flows.

Now we calculate NPV PI for each of the 9 projects

Case1:zulu 25/3 = 8.3

Case 2:Alpha -1/2 = -0.5

Case 3:Tango: 2.75/0.5 = 5.5

Case 4:beta 0/3 = 0

Case 5:Sierra: 29.5/ 4.5 = 6.5

Case 6: Echo: 2/7 = -0.28

Case 7:Romeo: 21/4 = 5.25

Case 8:Oscar 6.5/1 = 6.5

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Case 9:Lima 54/10 = 5.4

The process of adding development cost of projects based on their ranking is done until the

capacity of $25million is reached. the limit of $25million in scenario 2 reaches at project Beta.

Hence, the decision to go is made for every project accordingly. Alpha and echo are decided to

kill since their developmental costs exceeds $25m and they have negative NPV PI value.

Scenario 3

EXPECTED COMMERCIAL VALUE:

The above scenario is about the calculations generated to analyze the estimated commercial

value profitability index. Taking into account the factors such as NPV, financial planning at the

development stage.

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From the above given figure we can calculate the factors such as launch cost,

developmental cost and ECV.

STRENTGHS OF ECV

The potential undefined commercial value is calculated.


NPV and ECV are relative and provide proper estimate of the project commercial

value.

Weakness of ECV

The values of the factors estimated results in ambiguity in several means.


Difficult to adapt to changes based on external and internal conditions.

The commercial value of the project is calculated in this scenario and the Calculation of the

projects and their ranking.

(Probability of commercial success* PV commercialization cost)*(probability of technical

success- development cost) = ECV

ECV PI = ECV/developmental cost.

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Zulu: (0.56*30-2)*(0.41 3) = 3.06

For ECV PI 3.06/3=1.02

Alpha: (0.34*2 1)*(0.79 2) = - 1.53

For ECV PI -1.53/2=-0.765

Tango: (0.54 * 4 0.75)* (0.56- 0.5) = 78.46

For ECV PI 78.46/0.5=156.92

Beta: (0.58 * 5 2) * (0.34 3) = -2.694

For ECV PI -2.694/3=-0.898

Sierra: (0.58 *42 -8)*(0.58 4.5) = 5.97

For ECV PI 5.97/4.5=1.32

Echo: (0.45* 10 5)*(0.76 7) = -6.74

For ECV PI-6.74/7=0.96

Romeo: (0.37 * 27 2)*(0.71 4) = 1.67

For ECV PI 1.67/4=0.41

Oscar: (0.43* 8 0.5)*(0.42-1) = 0.02

For ECV PI 0.02/1=0.02

Lima: (0.31*69 5)*(0.65-10) = 0.65

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For ECV PI 0.65/10=0.065

According to the tabulation, Tango is ranked 1and Sierra is ranked 2 and the rest follow

accordingly. The limit of the project at $25million of development cost is reached are

go and the rest are decided as kill. Alpha, Oscar and Lima are decided to kill as

explained earlier.

Scenario 4

The limit of $17.5 million is given in this scenario 4. The remaining procedure follows as

scenario 3.

The results are

Zulu: ECV PI= 0.406 ,GO

Alpha: ECV PI =-0.815,KILL

Tango: ECV PI =0.13,GO

Beta: ECV PI =-0.898,KILL

Sierra:ECV PI=0.45,GO

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Echo: ECV PI-6.74/7=-1.12,KILL

Romeo: ECV Pi=0.41,GO

Oscar: ECV PI =-0.05,KILL

Lima: ECV PI =0.065,KILL

REFERENCES:

http://www.businessdictionary.com/definition/net-present-value-NPV.html

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