Company XYZ is a family-owned paper company that employs 55 people and has been in business for 18 years. It is located in a city of 45,000 people in South Dakota. Its annual income is $21.5M. The IT department consists of 7 people of which 3 are developers. The company has been steadily increasing its market share of paper business in the state. The company's strategic initiatives include: - increase paper manufacturing market share in Midwest region by 10% in 2017 - develop new markets based on the company's areas of expertise - increase productivity - reduce dependence on equipment suppliers The company developed the "Red Sky" and "Yellow Moon" softwares for internal use in 2014. The IT department took it upon themselves to make tweaks to the existing softwares in an effort to market them to the public. Two of the developers have been with the company for six months, so they did not originally develop the Red Sky and Yellow Moon softwares but are talented and ambitious-according to the senior developer. The company has never tried marketing software, but the CEO has decided to choose one of these projects to market, but he is asking for help in making a choice. The company has two project managers, and you have been brought in to work with the CEO and a leadership team to choose one software. Choose 2-3 tools that we have studied during this class (the Seitz Case Study may help you) to support the project you as the PM would recommend to the CEO/leadership. In order to assist you in making a choice, some supporting financial data is listed below but it is not complete. You will need to calculate the NPV for Project 1 and the IRR rate for Project 2 in order to determine which of these projects are better from a financial standpoint. The financial data is only one factor in selecting a project so you may choose to use the financial data or use other tools such as a SWOT analysis, weighted scoring model, risk matrix, etc. Analyze this scenario for risks-both positive and negative. There is no right or wrong answer as long as you can build a case for your recommendation. Project 1 Investment project "Red" is the development of a new version of the product "Red Sky". Calcium carbonate is produced at paper mills as filler for paper; however, with this process, CO2 gases are emitted. This software controls the form of the calcium carbonate emitted by adjusting reactions during the carbonation process. This lowers the CO2 gas emissions at the mills which is a more environmentally friendly process. Red Sky had some glitches, but now that Red has been tested and used, the developer believes it is ready to market to other industries to limit their CO2 emissions. The cost for development is $100,000 this year. Next year, the assumption is the company will be able to sell licenses for $70,000, in two years sales are expected to be $50,000. Interest rate is 10%. The Net Present Value (NPV) of a project is defined as the difference between present value of cash inflow (revenue, PV in) and present value of cash outflow (cost, PV out) of that project over the project life cycle time. Complete the table below to determine what the NPV is for project 1. The internal rate of return of a project is defined as the interest rate at which the net present value of that project equals zero. For Project 1, the IRR is 13.899\%. Project 1 recovers its initial investment in future dollars in Year 2. Year 1= Cash in /(1+IRRrate)1 Year 2= Cash in/(1+IRRrate)2 Year 3= Cash in /1+IRR rate )3 Project 2 Investment project "Yellow" is the development of a new version of product "Yellow Moon". The software is an inventory delivery system but "Yellow" has the capability of using drones to deliver small shipments on an emergency need basis to customers. Yellow Moon has only been used internally to manage inventory but with the ability to deliver via drones, the developers believe there is a larger market to be had for this product. The cost for development is $150,000 this year. Next year, license sales are expected to be $90,000, in two years the sales are expected to be $85,000. Interest rate is 10%. The Net Present Value (NPV) of a project is defined as the difference between present value of cash inflow (revenue, PV in) and present value of cash outflow (cost, PV out) of that project over the project life cycle time. The NPV is $2,066. The internal rate of return of a project is defined as the interest rate at which the net present value of that project equals zero. For Project 2, the IRR is 13.899%. What year will Project "Yellow" recover its initial investment of $150,000 if the IRR rate is 11.035% ? Year 1= Cash in /(1+IRRrate)t Year 2= Cash in /(1+IRRrate)2 Year 3= Cash in /1+IRR rate )3
