kindly do the exercise of Q4 in page 213, Q4 in page 257 and Q6 in page 258. see the attached pages of questions

258 CHAPTER 7 / BUDGETING: ESTIMATING COSTS AND RISKS price to the Air Force is fixed at $550 each, what can you beginning of the project. After the fourth year, the pry say about the profitability of the first and second contracts, will have no residual value. Assume that the cash it and hence the bidding process in general? estimates for each year are best represented by a triage 6. Your firm designs PowerPoint slides for computer training distribution and that the hurdle rate is 20 percent. classes, and you have just received a request to bid on a (a) Use Crystal Ball" to find the expected NPV of contract to produce the slides for an eight-session class. From project. previous experience, you know that your firm follows an (b) What is the probability that the project will yield 85 percent learning rate. For this contract it appears the effort return greater than the 20 percent hurdle rate? will be substantial, running 50 hours for the first session. Your firm bills at the rate of $100/hour and the overhead is Year Pessimistic Most Likely Optimist expected to run a fixed $600 per session. The customer will pay you a flat fixed rate per session. If your nominal profit $14,000 620,000 $2210 margin is 20 percent, what will be the total bid price, the per 19,000 25,000 30.017 session price, and at what session will you break even? 27,000 30,000 3600 7. A light manufacturing firm has set up a project for develop- ing a new machine for one of its production lines. The most 32,000 35,000 39.10 likely estimated cost of the project itself is $1,000,000, but the most optimistic estimate is $900,000 while the pessimists predict a project cost of $1,200,000. The real problem is that 9. If an inflation rate of 2 percent, normally distributed with even if the project costs are within those limits, if the project standard deviation of .333 percent, is assumed, what is the itself plus its implementation costs exceed $1,425,000, the expected NPV of the project in Problem 8, and what is the project will not meet the firm's NPV hurdle. There are four probability that it will qualify? cost categories involved in adding the prospective new 10. A cloud storage startup has decided to upgrade its sene machine to the production line: (1) engineering labor computers. It is also contemplating a shift from its Uni cost, (2) nonengineering labor cost, (3) assorted material based platform to a Windows-based platform. Three map cost, and (4) production line downtime cost. cost items will be affected whichever platform they choose The engineering labor requirement has been estimated to hardware costs, software conversion costs, and employet be 600 hours, plus or minus 15 percent at a cost of $80 per training costs. The firm's technical group has studied the hour. The nonengineering labor requirement is estimated matter and has made the following estimates for the cost to be 1500 hours, but could be as low as 1200 hours or as changes in 5000s. high as 2200 hours at a cost of $35 per hour. Assorted Using Crystal Ball" and assuming that the costs may of material may run as high as $155,000 or as low as be represented by BetaPERT distributions, simulate the $100,000, but is most likely to be about $135,000. The problem 1000 times. Given the information resulting from best guess of time lost on the production line is 1 10 hours, the simulation, discuss the decision problem. possibly as low as 105 hours, and as high as 120 hours. Windows Unix The line contributes about $500 per hour to the firm's profit and overhead. What is the probability that the new Low Likeliest High Low Likeliest High machine project will meet the firm's NPV hurdle? Hardware 100 125 200 80 110 8. A four-year financial project has estimates of net cash flows Software 275 300 500 250 300 shown in the following table. It will cost $65,000 to imple- ment the project, all of which must be invested at the Training 10 15 10 175 INCIDENTS FOR DISCUSSION Preferred Sensor Company Sean Cole has been appointed project manager of the Preferred that affect the manufacturing cost of sensors be run against Sensor Company's new sensor manufacturing process project. sensitivity model in order to generate data to calculate the return Sensors are extremely price-sensitive, and Preferred has done a on investment. The net result is that project managers, like Sc great deal of quantitative work so it can accurately forecast are under a great deal of pressure to submit realistic budg changes in sales volume relative to changes in pricing. so goo-go project decisions can be made quickly. Dude hi The company president, "Dude" Sensor, has considerable canceled several projects that appeared marginal during the faith in the firm's sensitivity model and insists that all projects feasibility stages and recently fired a project managerPROBLEMS 257 QUESTIONS Material Review Questions 6. Describe the learning curve phenomenon. 1. What are the advantages of top-down budgeting? Of 7. How might you determine if cost estimates are biased? bottom-up budgeting? What is the most important task 8. What is "program budgeting"7 for top management to do in bottom-up budgeting? 9. What is the difference between project- and category- 1. In preparing a budget, what indirect costs should be oriented budgets? considered? 10. How does a risk analysis operate? How does a manager 3. Describe the purpose and use of a tracking signal. interpret the results? 4. Describe the top-down budgeting process. 5. What is a variance? class Discussion Questions 11. Discuss ways in which to keep budget planning from 19. How does the fact that capital costs vary with different becoming a game. factors complicate the budgeting process? 12. List some of the pitfalls in cost estimating. What steps can a 20. Why is learning curve analysis important to project manager take to correct cost overruns? management? 13. Why do consulting firms frequently subsidize some pro- 21. Why is it "ethically necessary to be honest" in negotiations jects? Is this ethical? between a superior and subordinate? 14. What steps can be taken to make controlling costs easier? 22. The chapter describes the problems of budgeting for Can these steps also be used to control other project S-shaped and J-shaped life-cycle projects. What might parameters, such as scope? be the budgeting characteristics of a project with a straight 5. Which budgeting method is likely to be used with which line life cycle? type of organizational structure? 23. Interpret the columns of data in Figure 7-11. Does the 16. What are some potential problems with the top-down and $14,744 value mean that the project is expected to return bottom-up budgeting processes? What are some ways of only this amount of discounted money? dealing with these potential problems? 24. How would you find the probability in Figure 7-10 of an 17. How is the budget planning process like a game? NPV of over $25,000? 18. Would any of the conflict resolution methods described in 25. Does the spread of the data in Table 7-4 appear realistic? the previous chapter be useful in the budget planning Reconsider Table 7-4 to explain why the simulated out- process? Which? come in Figure 7-11 is so much less than the value originally obtained in Table 7-3. PROBLEMS I. Using the cost estimation template and Actuals in Figure 7-5, $1,500, $2,000, and $3,500, respectively. Find the mean compare the model in the figure with the following estimates forecast NPV using Crystal Ball". What is the probability derived from a multiplicative model. Base your comparison on the actual NPV will be positive? the mean bias, the MAR, and the tracking signal. Comment. 4. A production lot of 25 units required 103.6 hours of effort. Period: 1 2 3 4 5 6 7 8 Accounting records show that the first unit took 7 hours. Estimated: 179 217 91 51 76 438 64 170 What was the learning rate? 5. If unit 1 requires 200 hours to produce and the labor 2. Conduct a discounted cash flow calculation to determine records for an Air Force contract of 50 units indicate an the NPV of the following project, assuming a required rate average labor content of 63.1 hours per unit, what was the of return of 0.2. The project will cost $75,000 but will learning rate? What total additional number of labor-hours result in cash inflows of $20,000, $25,000, $30,000, and would be required for a follow-on Air Force contract of $50.000 in each of the next four years. 50 units? What would be the average labor content of this 3. In Problem 2, assume that the inflows are uncertain but second contract? Of both contracts combined? If labor normally distributed with standard deviations of $1,000, costs the vendor $10/hour on this second contract and thePROBLEMS 213 The project manager for the project in Problem I has estima- ned the probabilities of not detecting the risks in time to react A manufacturer is considering launching a project to produce w them as follows, again on a seven-point scale: Threat 1: 4. this item and could produce it by one of three methods: Threat 2: 1, Threat 3: 3. Threat 4: 6. Construct a FMEA table to a. Use existing tools at a cost of $6 per unit. determine which risks are now the "critical," "monitor," and b. Buy cheap, special equipment for $1,000. The value of ignore" threats. How have they changed from Problem 1? the equipment at the end of the year (salvage value) is Why? Does this new ranking seem more realistic? zero. The cost would be reduced to $3 per unit. & You might not have realized it, but getting a college degree c. Buy high-quality, special equipment for $10,000 that is a project. Assume you are in a degree program in college can be depreciated over four years (one fourth of the and are concerned about getting your degree. Create a cost each year). The cost with this equipment would be fishbone (cause-effect) diagram, with "failure to get degree" only $2 per unit. as the problem outcome. Identify at least four possible threat Set up this project as a decision tree to find whether the risks for this problem to occur. Then for each threat list at manufacturer should approve this project, and if so, which least three reasons/factors for how that threat could conceiv method of production to use to maximize profit. Hint: Com- ably come to pass. Finally, review your diagram to estimate pare total annual costs. Assume production must meet all probabilities and impacts of each threat to getting your demand; each unit demanded and sold means more profit. degree. Based on this analysis, what threats and factors should you direct your attention to, as the project manager of 5. Given the decision tree below for a two-stage (decision) your project to get your degree. project to enter a joint venture, find the best alternatives (among ap-a, in the figure) and their expected values. The 4. The yearly demand for a seasonal, profitable item follows outcomes shown are revenues and the investment expenses the distribution: are in parentheses. Node 4 represents the situation where Demand (units) Probability alternative a, was chosen, and then the top outcome with a 70 percent probability occurred; note that there is no choice of 1,000 .20 alternative if the 30 percent probability outcome occurred. 2.000 ischar ant or be .30 d bama guib Similarly with Node 5. 3,000 -40 6. Medidata Inc. has identified three risk opportunities for their 4,000 new medical database project. One is an opportunity to .10 extend the database to include doctors as well as hospitals. 3,000 0.7 a4 2 - 1,000 (500) 0.3 RAPHY 2,000 -wod todeh00.212 0.2 500 0.4 0.3 1,000 0.5 3,500 (1,000) 3,000 0.6 Keep 4,000 Problem 5 Decision Tree