Question
Let's assume that SAP Corporation, a leader in the business applications software industry, is interested in developing a new application package for inventory management and
Let's assume that SAP Corporation, a leader in the business applications software industry, is interested in developing a new application package for inventory management and shipping control. It is trying to decide which project to select from a set of three potential alternatives.
Alternative 1 | |||||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Benefits | 0 | 70000 | 75000 | 70000 | 75000 | 80000 | 85000 | 90000 | 95000 |
Costs | 300000 | 5000 | 5000 | 5500 | 5500 | 7000 | 7000 | 7000 | 8000 |
Alternative 2 | |||||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Benefits | 0 | 50000 | 60000 | 70000 | 80000 | 85000 | 90000 | 95000 | 100000 |
Costs | 260000 | 5000 | 5500 | 6000 | 6500 | 7000 | 7500 | 8000 | 8500 |
Alternative 3 | |||||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Benefits | 0 | 55000 | 60000 | 75000 | 80000 | 85000 | 90000 | 95000 | 100000 |
Costs | 270000 | 5000 | 5500 | 6000 | 6500 | 7000 | 7500 | 8000 | 9000 |
Based on past commercial experiences, the company feels that the most important selection criteria for its choice are: net present value, payback period, return on investment, and internal rate of return. Each criterion is ranked according to its relative importance. Our choice of projects will thus reflect our desire to maximize the impact of certain criteria on our decision. We assign a specific weight to each of our four criteria:
Criterion | Weight |
Net present value | 35% |
Payback period | 35% |
Return on investment | 10% |
Internal rate of return | 20% |
In addition to developing the decision criteria, we create evaluative descriptors that reflect how well the project alternatives correspond to our key selection criteria. We evaluate each criterion (which is scored high, medium, or low) according to the following Table:
Criterion | Score | ||
low | medium | high | |
Net present value | 1 | 2 | 3 |
Payback period | 3 | 2 | 1 |
Return on investment | 1 | 2 | 3 |
Internal rate of return | 1 | 2 | 3 |
- For each alternative, calculate the net present value, the payback period, the return on investment, and the internal rate of return using a discount rate of 12 percent.
2. Which project alternative is the best? Why?
Please send your answer in Excel sheet
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