Question

A financial services company has a long list of potential projects to consider this year. Managers at this company must decide which projects to pursue and how to define the scope of the projects selected for approval. The company has decided to use a weighted scoring model to help in project selection, using criteria that map to corporate objectives. All projects selected must develop a WBS using corporate guidelines.

You are part of a team that will analyze proposals and recommends which projects to pursue. Your team has decided to create a weighted scoring model using the following criteria and weights:

• Criteria Weight 1
• Enhances new product development 20% 2
• Streamlines operations 20% 3
• Increases cross-selling 25% 4
• Has good NPV 35%

To determine the score for the last criterion, your team has developed the following scoring system:

• NPV is less than 0, the score is 0
• NPV is between 0 and $100,000, the score is 25
• NPV is between $100,000 and $200,000, the score is 50
• NPV is between $200,000 and $400,000, the score is 75
• NPV is above $400,000, the score is 100

The following is information for three potential projects:

• Project 1:
  • Scores for criteria 1, 2, and 3 are 10, 20, and 80, respectively
  • Estimated costs the first year are $500,000, and costs for years 2 and 3 are $100,000 each
  • Estimated benefits for years 1, 2, and 3 are $200,000, $400,000, and $600,000, respectively
• Project 2:
  • Scores for criteria 1, 2, and 3 are all 50
  • Estimated costs the first year are $700,000, and costs for the second year are $200,000
  • Estimated benefits for years 1 and 2 are $300,000 and $700,000, respectively
• Project 3:
  • Scores for criteria 1, 2, and 3 are 0, 50, and 80, respectively
  • Estimated costs the first year are $300,000, and costs for years 2, 3, and 4 are $100,000 each
  • Estimated benefits for years 1, 2, 3, and 4 are $0, $600,000, $500,000, and $400,000, respectively

• Develop a spreadsheet to calculate the NPVs and weighted scores for the three projects
• Use a 10 percent discount rate for the NPV calculations

Answer 1

Citeria	Wt.		NPV	Score
1.Enhances new product development	20%		< 0	0
2.Streamlines operations	20%		0--100000	25
3.Increases cross-selling	25%		100000-200000	50
4.Has good NPV	35%		200000--400000	75
	100%		> 400000	100

Project 1		Score	Wt.	Score*Wt.
1.Enhances new product development		10	20%	2
2.Streamlines operations		20	20%	4
3.Increases cross-selling		80	25%	20
NPV=
((200000-500000)/1.1^1)+((400000-100000)/1.1^2)+((600000-100000)/1.1^3)=	350864	75	35%	26.25
Total Wted. Score			100%	52.25
Project 2
1.Enhances new product development		50	20%	10
2.Streamlines operations		50	20%	10
3.Increases cross-selling		50	25%	12.5
NPV=
((300000-700000)/1.1^1)+((700000-200000)/1.1^2)=	49587	25	35%	8.75
Total Wted. Score			100%	41.25
Project 3
1.Enhances new product development		0	20%	0
2.Streamlines operations		50	20%	10
3.Increases cross-selling		80	25%	20
NPV=
((0-300000)/1.1^1)+((600000-100000)/1.1^2)+((500000-100000)/1.1^3)+((400000-100000)/1.1^4)=	645926	100	35%	35
Total Wted. Score			100%	65
Summary
Weighted Score (From above)		Ranking
Project 1	52.25	2
Project 2	41.25	3
Project 3	65	1