Question

Course: Project Management

Question 2

A. Paakot Ltd, a lumber processing firm, intends to diversify their investment portfolio. In view of this, management has decided to put up a hostel accommodation facility for university students.

The initial capital outlay required for the project over a two-year period will be a total of $500,000. Paakot Ltd intends to invest $350,000 immediately and the final $150,000 in one year’s time. Starting from year 2, the project is expected to generate a stream of revenues of $100,000, $120,000, $80,000, $200,000 per year respectively, for the firm. The required rate of return is 15%, and the expected rate of inflation over the life of the project is projected to remain steady at 3%.

A. As a project consultant, you have been contracted by the firm to appraise the viability of the project, Using:

(i) The Simple Payback Method. [8 marks]

(ii) The Net Present Value Method. [8 marks]

(iii) In your opinion, would you advise the firm to go ahead with the project or not? [4 marks]

B. Explain with examples the risks a company is likely to face if it fails to complete a project on time.

[5 marks]

C. Using an appropriate illustration, discuss the scoring model as a project screening model. [5 marks]

Answer 1

A. First, we will calculate the rate of discounting to be used: 15%(1.03)= 18.45%

Year	Amount	Cummulative Amount
0	(350,000.00)	(350,000.00)
1	(150,000.00)	(500,000.00)
2	100,000.00	(400,000.00)
3	120,000.00	(280,000.00)
4	80,000.00	(200,000.00)
5	200,000.00	-

Simple Payback Period = 5 years as cummulative amount turned zero at year end 5.

NPV

Year	Amount	PVF @ 18.45%
0	(350,000.00)	1.00
1	(150,000.00)	0.84
2	100,000.00	0.71
3	120,000.00	0.60
4	80,000.00	0.51
5	200,000.00	0.43
	NPV	(206,742.03)

NPV will be negative as it already gives zero return without considering discount factoring as determined in simple payback period.

A.iii) The firm is not recommended to go for project considering financial amounts.

B.

Risk	Example
Project -specific Risks	Students may go be willing more for off-campus accomodations
Industry-specific risk	As COVID-19 lockdown,let students move from campus accomodations to their hometown
Market Risk	Labor shortages occurred and project delayed
Economic Risk	High Inflation Rate
Competition Risk	Off-campus prices may be significantly lower.

C. In Scoring model,we provide rating to different criteria having a specified weight and screen projects with high total rating.

Illustration:

Criteria	Weights	Project A	Project B	Project C
Market share effect	10%	50	23	66
Competition	20%	60	60	23
Risk	30%	45	58	23
NPV	30%	65	23	45
Payback	10%	23	48	45
		52.3	43.4	36.1

In the above illustration, Project A will be selected.

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