Compare and contrast each of the scenarios and provide a final suggestion on the

ID: 2729667 • Letter: C

Question

Compare and contrast each of the scenarios and provide a final suggestion on the type of analysis that should be completed AND what the decision is for each project.

Scenario 1 – NPV, Business as Usual

Eliminate the Negative Projects

The team has been working throughout the Pre-development stage in order to get an understanding of the present value of each of the (9) projects by understanding market pricing and the position within the market of each of the prospective projects, among other things. This analysis has given the team accurate information surrounding the overall development costs and costs to commercialize for each project as well. As a part of your normal business strategy, prepare a report analyzing the net present value of each project, rank those projects, and provide a Go/Kill recommendation for each.

Scenario 2 – NPV PI, A New Ranking Strategy with a Budget

$25M Budget

As your company looks to manage resources, your director wants to understand how you can maximize your Bang-for-buck on the work your team is doing, and has asked you to add a NPV productivity analysis to your Go/Kill decision process. Additionally, he has capped you at $25M. Prepare a report analyzing the NPV PI of each project, rank those projects, and provide a Go/Kill recommendation for each, maintaining your $25M development budget. Maximize the NPV of your portfolio using this method.

Scenario 3 – ECV PI, Understanding The Expected Commercial Value

$25M Budget

Your director is interested in understanding the expected commercial value method and how it might impact investment decisions. He also wants to maximize the bang for buck so he has asked you to add the expected commercial value and ECV PI to your analysis. You are able to do this because your team has worked hard to understand the likelihood of commercial and technical success in each project. Prepare a report analyzing the ECV PI of each project, rank those projects, and provide a Go/Kill recommendation for each, maintaining your $25M development budget. Maximize the ECV of your portfolio using this method.

Scenario 4 – ECV PI, A Trimmed Budget, and Modified Risk

$17.5M Budget, Minimize Risk

Your director, given the ability to implement risk into the decision process, wants to evaluate one additional scenario. The VP mention in his staff meeting last week that the market is changing and he may be implementing a 30% reduction in budgets across the company. Assuming this information to be true, your team has created a scenario based on the changing market that has updated rick assessments forboth the probability of commercial and technical success. Using this information, prepare a report analyzing the ECV PI of each project, rank those projects, and provide a Go/Kill recommendation for each, maintaining your $25M development budget. Maximize the ECV of your portfolio using this method and new data.

present value development cost commercialization cost NPV Ranking decision zulu alpha tango beta sierra echo Romeo oscar lima

Explanation / Answer

As no quantitative figures (cash inflows, discount rate, tax rate etc) and numbers are provided i am doing a theoretical analysis of each scenario:

Scenario 1: NPV analysis - Under this method, the project with the highest NPV will be selected. It is a simple technique of capital budgeting and considers the time value of money.

Scenario 2: NPV PI analysis - Under this method, there will be two considerations - (i) npv and (ii) budget cap of $25 million.

Project 1

Project 2

Project 3

Project 4

Project 5

Project 6

Project 7

Project 8

Project 9

NPV

-10

-100

Budget

Scenario 3: ECV PI: EVC = [(npv*probability of success) - commercialization costs)*(probability of technical success]-product development cost.

The same method as explained in scenario 2 will be used. Projects outside the budget cap will be eliminated and the remaining projects will be selected on the basis of highest ECV.

Scenario 4: The same method as in scenario 3 will be used except the budget cap will be $25 million*(100%-30%) = $17.5 million