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Management is evaluating 11 projects that vary in intention: generate additional sales, enter new markets, reduce inventory, streamline processes with partners, and reduce wastes. Projects are evaluated based on their contribution to value created, risk, and criticality to company objectives.

You have a budget of $1,000,000 to seed new projects. Cross-functional teams have prepared proposals, finance has estimated cash flows from EBIT, taxes, depreciation, and working capital (inventory, credit terms, etc.) over the life of each project, and management has determined priority and risk levels. See associated workbook for these evaluations. The financial analyses for Projects A, B, C, D, & G are completed for a head start.

Allocate the budget to maximize Criticality, NPV, Profitability Index, and Payback. You wont be able to maximize all 4 factors simultaneously, so select an optimal project portfolio. The firms WACC is 10%; it adjusts WACC to 15% for riskier projects and to 7% for less risky projects. The NPV, PI, and Payback are thus already risk adjusted; no need to treat risk as another criterion.

M81 A C E I J K L M N B WACC= D 10% Low Risk WACC= F G 7% High Risk WACC H 15% Year Project A Criticality Medium Risk Moderate Project Cash Flow Originating Function Elements Operations Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows 250000 10000 100000 360000 223532 199523 0.1 75000 1000 NPV= PI PB= 199523 1.49 4.1 Low Moderate Sales 0 1 2 3 4 90000 110000 140000 160000 -10000 0 -1000 -500 0 -400000 -410000 90000 109000 139500 160000 -410000 81818 90083 104808 109282 -410000 -328182 -238099 -133291 -24009 Recovery Period 190000 125000 96000 90000 -20000 -2000 1000 3000 0 -350000 -370000 188000 126000 99000 90000 -370000 170909 104132 74380 61471 -370000 -199091 -94959 -20579 40893 Recovery Period 15000 15000 15000 9000 2500 -100000 - 105000 15000 15000 15000 11500 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows 50000 15000 76000 47190 88083 65000 36691 124774 NPV= PI= PB= 124774 1.34 3.3 0.3 High Mandatory Supply Chain 8000 2500 0 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows 10500 NPV= -53323 -105000 -91364 -78967 PB= DNR -53323 DNR D Low High Operations 190000 -3000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows 230000 -1000 -1000 -250000 -251000 229000 -251000 199130 -251000 -51870 Recovery Period 80000 -5000 -100000 -67697 -59843 Recovery Period 150000 60000 -500 5500 25000 149500 90500 98299 51744 187828 239572 187000 141399 89529 0.4 50000 NPV= PI PB 239572 1.95 1.4 Medium Low Purchasing 50000 45000 30000 5000 10000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows F Medium Moderate Sales 15000 20000 35000 70000 20000 -1000 65000 1000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows -2000 -80000 72000 2000 31000 Data M81 A F G 15000 H 20000 39F Medium Moderate Sales 35000 70000 20000 -1000 65000 1000 MN 72000 2000 31000 -2000 -80000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows Medium Low Supply Chain 15000 10000 26000 - 1000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows -10000 -40000 -50000 -50000 -50000 8000 5000 5000 18000 13732 8361 0.4 100000 6000 NPV= PI= PB= 25000 15000 10000 23364 13102 8163 -26636 -13534 -5371 Recovery Period 100000 150000 140000 -5000 -1000 8361 1.17 3.4 H High Low Operations -30000 - 300000 50000 25000 10000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows Low High Marketing 30000 30000 30000 30000 -175000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows High Low Purchasing 50000 - 1000 40000 1000 30000 2000 25000 2000 20000 1000 -3000 -100000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows Medium Moderate Operations 900 800 2000 -2000 -10000 Operating Cash Flow Change in NWC Capital Spending Sum of Cash Flows Discounted Cash Flows Cumulative Cash Flows

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