PROJECT EVALUATION PLAN ESSAY.

PROJECT EVALUATION PLAN ESSAY

PROJECT EVALUATION PLAN

Instructions:-

PROJECT EVALUATION

You are required to submit a project report that describes and evaluates three project alternatives, using the project evaluation techniques discussed in this course. The project alternatives may be hypothetical. Assume you are writing a proposal to your Board of Directors.

Your analysis should include brief estimates of projected revenues and costs of productions and use Discounted Cash Flow analysis, using a justified discount rate to give Net Present Values of three (3) alternatives of a capital investment project as well as determine the Internal Rate of Return.

Description of the project alternatives should be less than one (1) page.

The layout and content should be:

Prepare a clear definition of the objectives of the project and, where practicable, this should be related to the current strategies of the organisation.
The formulation of options to achieve the objectives (e.g. set up a manufacturing plant at locations in countries A, B, or C). Three investment alternatives should be compared.
A formulation of the detailed costs and benefits of the options.
Calculate the cost of capital (debt / equity).
Evaluate each option using D.C.F. techniques (use a minimum period of 5 years and justify the discount rate used).
Evaluation of the risks of the project.
Recommendation of the most economic option and discussion of any non-financial factors relevant to your decision.
The assignment report should be brief and to the point.

NOTE: The project to be analysed must be approved by the lecturer before commencing the assignment. You should have sent your teaching staff an email with your proposed topic by Day 7 of Week 8.

Suggested format for your report. To ensure adequate coverage of the topic the following format is suggested for your report:

Executive summary
Table of contents
Introduction (not more than one page for introducing the project)
Discussion of options
Cost of capital assumptions and calculations (debt/equity costs)
Description of the costs and benefits of the project
Evaluation of the project – e.g. DCF calculations to give NPV and IRR
Evaluation of the risk of the project
Recommendations
Bibliography

More info:
You can create any three scenarios for the week 10 assignment. As such, all three can be workplace based projects , or entirely hypothetical projects or ventures – which means you can generate the numbers yourself

I usually suggest to students that if they don’t have anything to hand at work, to select 3 different geographical locations to set up the same type businesses. Many students go for setting up in 3 different countries as the variation gives them more to work with in the risk analysis section

Solution

PROJECT EVALUATION PLAN ESSAY.

PROJECT EVALUATION PLAN

Introduction and project objectives

XYZ limited, a company domiciled in California, United States deals with the manufacture and sale of specialized health monitoring gadgets that can track your body vital signs during exercise. It’s worn as a wrist band and is able to capture health information such as heart rate, blood pressure, blood sugar level which helps manage lifestyle diseases such as hypertension and diabetes. In a recent board meeting, it was noted that despite the high uptake of the gadget in California, there is still an unmet need in the wider global market. The board, therefore, tasked me, as the finance manager in charge, to come up with a proposal on the best investment decisions that would increase the company earnings. In this project report, I propose and evaluate three projects using various capital investment appraisal methods learned in this course such as the Net Present Value (NPV) and Internal Rate of Return (IRR). In making a recommendation on what project best suits the company goals and objectives, the risks associated with each project will also be evaluated.

Projects description

Financial and market analysis has revealed that XYZ limited may achieve its intended goals by setting up a manufacturing plant in either South America, Europe, or distributing the gadgets directly to clients from the California manufacturing plant. For the purpose of this assignment, setting up a manufacturing plant in South America will be our project 1, Europe project 2 and direct distribution is project 3. The appraisal covers a projected period of five (5) years. The initial capital outlay, revenue, and expenditure resulting in net cash flows are shown for each project.

Calculation of cost of capital

For the purpose of this assignment, the source of funding for these projects will be entirely on external borrowing. The cost of debt, therefore, shall be the interest rate of the borrowings but since interest expense is a tax deductible expense the cost of debt, therefore, will be calculated as X (1-t), where t is the marginal tax rate. Interest rate assumed is 14.28% which is the average interest rate in the financial market while tax rate is assumed at 30%

Utilizing the above formula;

Cost of debt = X (1-t)

Cost of debt=14.28% (1-30%)

Cost of debt= (14.28%) 70%

Cost of debt = 10%

Project 1 (manufacturing plant in South America)

Project 2.

Project 3

Recommendations and conclusion ($figures in millions)

As shown in the above computations, project 1 yields a net present value of $ (147.28), an internal rate of return of 8.59% with a standard deviation (risk) of $471.59; project 2 yields a net present value of $1,546.33, an internal rate of return of 13.50% with a standard deviation (risk) of $738.99 while project 3 yields a net present value of $1,243.53, an internal rate of return of 14.56% and a standard deviation of $389.36.  Project 1 is out of the question, as it yields negative net present value and cannot, therefore, be undertaken as it would lead to loss of shareholders wealth, project three is less risky, although it yields a lesser net present value as compared to project two, which, although bears the highest level of risk, also  yields the highest returns. The recommendation for selecting project two is also supported by the slightly lower internal rate of return as compared to project three. Setting up a project in Europe will not only lead to positive returns but will also create employment for the local population and enhance the company brand in the global market.