Question

You are the head of project selection for Broken Arrow Records (BAR). Your team is considering three new projects, each with a unique sound and style. Based on past history, management requires a 20% rate of return. Additionally, they have allocated $1 million toward the production of these albums. Finally, management wants you to find new talent without taking risks. So, give the following weights to projects;

New Artist = 10, Risk = 6, Genre = 3, Diversity = 2

Given the following information about each project, prioritize each project. That is, put them in order of which BAR should do first, second, and third; money permitting, of course.

Note: You will use the Project Selection Matrix, the Payback Period, and the NPV to make your decision.

Project: Time Fades Away

            New Artist: 10

            Risk: -10

Genre: 7

            Diversity: 3

Year	Investment	Revenue
0	-$600,000.00	$0.00
1	$0.00	$500,000.00
2	$0.00	$75,000.00
3	$0.00	$20,000.00
4	$0.00	$15,000.00
5	$0.00	$10,000.00

Project: Tears in the Rain

            New Artist: 5

            Risk: -5

Genre: 9

            Diversity: 2

Year	Investment	Revenue
0	-$400,000.00	$0.00
1	$0.00	$400,000.00
2	$0.00	$100,000.00
3	$0.00	$25,000.00
4	$0.00	$20,000.00
5	$0.00	$10,000.00

Project: On the Beach

            New Artist: 2

            Risk: -2

Genre: 3

            Diversity: 2

Project: On the Beach
Year	Investment	Revenue
0	-$200,000.00	$                -
1	$                 -	$275,000.00
2	$                 -	$75,000.00
3	$                 -	$10,000.00
4	$                 -	$7,500.00
5	$                 -	$1,500.00

SHOW EXCEL FORMULAS

Answer 1

Required Rate of Return (RRR)

20%

NPV=CFi/(1+RRR)^n

Payback period=Time taken to get back total investment amount

All figures in US dollars

Project: Time Fades Away

NPV=-6,00,000+(5,00,000/(1+.20)^1)+(75,000/(1+.20)^2)+(20,000/(1+.20)^3)+(15,000/(1+.20)^4)+(10,000/(1+0.20)^5)

NPV=-$1,08,423

Payback Period=3 +(5000/15000)Years

=3.33 Years

Project: Tears in th Rain

NPV=-4,00,000+(4,00,000/(1+.20)^1)+(1,00,000/(1+.20)^2)+(25,000/(1+.20)^3)+(20,000/(1+.20)^4)+(10,000/(1+0.20)^5)

NPV=$ 30,909

Payback Period= 4,00,000/4,00,000

=1 years

Project: On the Beach

NPV=-2,00,000+(2,75,000/(1+.20)^1)+(75,000/(1+.20)^2)+(10,000/(1+.20)^3)+(7,500/(1+.20)^4)+(1,500/(1+0.20)^5)

NPV=$ 91,257

Payback Period= 2,00,000/2,75,000

=0.73 Years

	New Artist	Risk	Genre	Diversity	Total Weight
Weight	10	6	3	2
Time Fades Away	10	-10	7	3	67
Tears in the Rain	5	-5	9	2	51
On the Beach	2	-2	3	2	21

Total weight=New artist Weight * Project alloted weight for new artist + Risk weight *

Project alloted weight for risk + Genre Weight * Project alloted weight for Genre + Diversity Weight * Project alloted weight for Diversity

For instance ,Time Fades Away=(10*10)+(6*-10)+(3*7)+(2*3)=67

Project	Total Weight	NPV	Payback Period	Priority
Times Fades Away	67	- $ 108,423	3.33 Years	No
Tears in the Rain	51	$ 30,909	1 Years	2nd
On the Beach	21	$91,257	0.73 Years	1st

1st Priorty is given to On the Beach Project because of it high cash in flow and high payback period ,Though its total weight is less as compare to other project.

Second Priority is given to Tears in The Rain for the same reason

Times Fades Away generated negative NPV and has low payback period ,though it has maximum total weight but if project is not profitable it will futile to start.