Question

Let's assume that SAP Corporation, a leader in the business applications software industry, is interested in developing a new application package for inventory management and shipping control. It is trying to decide which project to select from a set of three potential alternatives.

Alternative 1
Year	0	1	2	3	4	5	6	7	8
Benefits	0	55000	60000	70000	75000	80000	80000	80000	80000
Costs	225000	5000	5000	5500	5500	7000	7000	7000	8000

Alternative 2
Year	0	1	2	3	4	5	6	7	8
Benefits	0	50000	60000	70000	80000	85000	90000	95000	100000
Costs	260000	5000	5500	6000	6500	7000	7500	8000	8500

Alternative 3
Year	0	1	2	3	4	5	6	7	8
Benefits	0	55000	60000	75000	80000	85000	90000	95000	100000
Costs	270000	5000	5500	6000	6500	7000	7500	8000	9000

Based on past commercial experiences, the company feels that the most important selection criteria for its choice are: net present value, payback period, return on investment, and internal rate of return. Each criterion is ranked according to its relative importance. Our choice of projects will thus reflect our desire to maximize the impact of certain criteria on our decision. We assign a specific weight to each of our four criteria:

Criterion	Weight
Net present value	35%
Payback period	35%
Return on investment	10%
Internal rate of return	20%

In addition to developing the decision criteria, we create evaluative descriptors that reflect how well the project alternatives correspond to our key selection criteria. We evaluate each criterion (which is scored high, medium, or low) according to the following Table:

Criterion	Score
	low	medium	high
Net present value	1	2	3
Payback period	3	2	1
Return on investment	1	2	3
Internal rate of return	1	2	3

1.      For each alternative, calculate the net present value, the payback period, the return on investment, and the internal rate of return using a discount rate of 8 percent.

2.      Which project alternative is the best? Why?

Please send your answer in Excel sheet

Answer 1

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