Nova Western A Project Management Case Study
GROUP 2
Jihad Alfalaneh Malathi Govind Gandhi Suresh Babu Nidhin Rajan Shensi
Alifiya Lilamwala Adel Owhaib Sowmia Rangaraj
Submitted to: Dr. Ebrahim Sultani Due Date: 22 August 2013
CASE SYNOPSIS This presentation will examine Case Study 3.2 which is about project selection at Nova Western. These are the major points of the case:
Phyllis Henry (the senior manager) has assigned a team to evaluate two projects (Project Janus and Project Gemini) and determine which projects should be taken on by on Nova Western. One team was opted the scoring method (non-financial method) and the other team went with the net present value (NPV) method (financial method). Each method produced different results so Phyllis needs more help in explaining the disagreement of opinion from one technique to the next and deciding which project to elect.
PROJECT SELECTION Project Selection is a process to assess each project idea and select the project with the highest priority. Selection of projects is based on: •
Benefits: A measure of the positive outcomes of the project. These are often described as "the reasons why you are undertaking the project". The types of benefits of eradication projects include: Biodiversity Economic Social and cultural Fulfilling commitments made as part of national, regional or international plans and agreements.
•
Feasibility: A measure of the likelihood of the project being a success, i.e. achieving its objectives. Projects vary greatly in complexity and risk. By considering feasibility when selecting projects it means the easiest projects with the greatest benefits are given priority.
Flexibility: The model should be easily modified if trial applications require changes. It must, for example, allow for adjustments due to changes in exchange rates, tax laws, building codes, and so forth. Ease of Use: A model must be simple enough to be used by people in all areas of the organization, both those in specific project roles and those in related functional positions. Cost: The screening model should be cost effective. A selection approach that is expensive to use in terms of either time or money is likely to have the worst possible effect: causing organizational members to avoid using it because of the excessive cost of employing the screening model.
QUESTION 1
Phyllis has called you into her office to help her make sense of the contradictions in project evaluation. How would you explain the reasons for this divergence of opinion from one technique to the next? What are the strengths and weaknesses of each screening method?
There are several strengths and weaknesses of each project screening method The results of the two selection methods performed by the company, specifically the scoring model and the NPV analysis, have clearly yielded opposite outcomes. The scoring model, a non-financial screening method, suggests that Project Gemini is the right choice for the next new project. On the other hand, the NPV Analysis, a financial screening method, suggests the opposite. It is not uncommon for financial and non-financial screening methods to yield competing information. The next slides will show the strengths and weaknesses of the screening methods that have been mentioned in the case as well as the other alternative methods that have been suggested by the group. This table will help the company to know which method/s is/are appropriate to use to make the wisest decision.
Analytical Hierarchy Process (AHP) In this process, there are three criteria for evaluating project alternatives: (1)Financial benefits, (2) Contribution to strategy, and (3) Contribution to IT infrastructure. Advantages Ability to rank choices relative to their effectiveness in meeting conflicting objectives Ability to detect inconsistent judgments.
Disadvantages “It only works because the matrices are all of the same mathematical form – known as a positive reciprocal matrix.” (Coyle, 2004) The rating scale that is used is not very accurate and is not standardized
PAY BACK PERIOD METHOD http://www.youtube.com/watch?v=IW2qvXcrx6k The length of time required the recover the cost of an investment. Pay Back Period = Cost of Project / Annual Cash Flow Advantages “Allows the company to make a more intelligent determination of the length of time needed to satisfy the initial project investment”(Pinto, 2010) Easy to compute
Disadvantages Leaves out information regarding profitability during project payback periods as well as any profits made after payback periods end.
NPV ANALYSIS http://www.youtube.com/watch?v=7FsGpi_W9XI The difference between the present value of cash inflows and the present values of cash outflows. It is used in capital budgeting to analyze the profitability of an investment. Advantages Easy method to execute Ensures that the company will invest in a project that will definitely generate profit.
Disadvantages Ignores probabilities and risk Assumes that financial projections are accurate Assumes that strategic considerations are irrelevant Fails to deal with constrained resources Difficulty in making accurate long-term predictions
NPV AND PAYBACK ANALYSIS Project Janus
Initial Investment = $250,000 Life of the project = 5 Years Anticipated stream future cash flows Year 1 = $ 50,000 Year 2 = $ 100,000 Year 3 = $ 100,000 Year 4 = $ 200,000 Year 5 = $ 75,000 Calculated NPV = $ 60,995 Pay Back = 3 years
Project Gemini
Initial Investment = $400,000 Life of the project = 3 Years Anticipated stream future cash flows Year 1 =
$ 75,000
Year 2 =
$ 250,000
Year 3 =
$ 300,000
Calculated NPV = $ 25,695 Pay Back = 2.25 years
SCORING MODEL The scoring method involves ranking each criterion according to its relative importance. It is a formula that assigns points based on known information to predict an unknown future outcome. Advantages Appropriate to use in terms of knowing whether a project is aligned with the company’s strategic goals or not Easy to use and to comprehend as well
Disadvantages The rating scale (1 – 3 or above) that is used is not very accurate There is no certainty whether the link between the selected/chosen criteria and the company’s strategic goals are 100% aligned or not
SCORING MODEL Project Janus Category
Import ance
Score
Project Gemini Weighted Score
Category
Import ance
Score
Weighted Score
1. Strategic Fit
3
2
6
1. Strategic Fit
3
3
9
2. Probability of technical success
2
2
4
2. Probability of technical success
2
2
4
3.Financial risk
2
1
2
2
2
4
4.Potential profit
3
3
9
3.Financial risk 4.Potential profit
3
3
9
5.Strategic Leverage
1
1
1
5.Strategic Leverage
1
2
2
Score =22
Score =28
QUESTION 2
Choose the project that you feel, based on the above analysis, Nova Western should select. Defend your choice.
The best way to look which project is better to select is to know how long it will take for the project to pay back its initial budget and begin to generate positive cash flow for the company. Taking into account the rationale behind the NPV Analysis that it recognizes the time value of a money (a $ received today is worth more than a $ received tomorrow), it measures the project’s true profitability
PROJECT JANUS VS PROJECT GEMINI
Both projects are profitable. Both have relative importance to the market and to the company. Project Janus is the best project since it offers a higher net present value for the initial investment. However, when it comes to its relative importance as tested by the Weighted Scoring Method, Gemini is the choice. Therefore, the only solution to know which of the two projects is to be chosen is to conduct the payback period analysis.
Based on the computations and analysis above, although Project Janus has higher NPV, its payback period is longer than Project Gemini. So, if the firm does not wish to tie its money up too long, Gemini might be a reasonable alternative. Hence, among the three project selection methods, two of them support Project Gemini as the best project to choose.
QUESTION 3
What does the above case suggest to you about the use of project selection methods in organizations? How would you resolve the contradictions found in this example?
Simplistic models typically yield simplistic answers and their consistency from method to method is questionable. One simple solution to this case might be to use the results of the discounted cash flow analysis as an additional factor in the weighted scoring model, whereby net present value becomes an additional selection criterion to consider along with the other factors already listed. Based on the case, Phyllis’ staff constructed two projection selection methods in order to determine which project they have to support: one was financial and the other qualitative. However, there were problems in the results because it yielded different findings. Project Gemini was the best alternative in the scoring model while Project Janus has the higher NPV. From this conflict, we as the group suggested that it would be better to use another selection criterion so that to avoid biases and it would be easier for the top management to decide the best project that would give positive impacts in the company.
CONCLUSION
Project Selection is one of the tough decisions that an organization has to deal with since many resources are at stake, especially money. In choosing the right project to execute, it is best to always consider not only the possible revenue that it will generate in the future but also its relative importance to the market and to the company itself. In choosing the best project, there will be at least three evaluations to conduct by the top management in order to avoid biases in the organization. In choosing projects for organizations, choose the projects that will have long-term benefits.
