Introduction To Project Selection: Numerical Techniques Non-Numerical Techniques

Lecture 3 Project Selection Introduction
Introduction to Project Selection
Companies have limited funds available, consequently when presented with numerous
beneficial opportunities, as company is often faced with selecting a limited number of
projects from a large selection of available ideas. The paradox companies face is that
there is a limitless supply of ideas that will result in beneficial change, however, there is
only limited funding available to exercise these options.
Consequently, companies use project selection techniques to chose the most beneficial
project(s) from a selection of numerous projects. The available techniques are as follows:
Numerical techniques Non-numerical techniques
• Payback Period (PP)

• Return on Investment (ROI)
Financial
• Net Present Value (NPV)
Techniques
• Internal Rate of Return (IRR)
• Cost Break-Even Analysis
• Scoring Models (Such as the Factor • Social Responsibility
Model of Meredith and the Weighted
• Willingness-to-pay Test
Non-financial Evaluation Model)
Techniques
• Hicks-Kaldor Test
• Pareto Improvement Criterion
1. Financial & Numerical Models

Consider the following information provided by from three potential projects a company
considering conducting:
Interest Rate = 20% Project A Project B Project C Project D
Investment* R 1,200,000.00 R 1,200,000.00 R 900,000.00 R 1,200,000.00
Cash flow - Year 1 R 950,000.00 R 800,000.00 R 400,000.00 R 500,000.00
* It is important to note that the Investment is an outflow of funds, as this is the amount
being paid for the establishment of the project deliverable.
Cash flow is derived from either income, as a result of the company earning revenue from
the sale of something, or savings, as a result of reduced costs. Generally, cash flow
represents the net benefit (i.e. costs for that year have been offset against
revenue/savings).
Copyright © 2003 Norwin Lederer PMP® Page 1 of 17

File: Project Selection - Lecture 3.doc
1.1 Payback Period (PP)

Payback period is defined as the period of time within which the original investment is
recovered through the cash flow, which is not discounted for inflation.
Consider Plant A:
Cash flow -R1,2m
R950 000 R850 000 R800 000 R600 000 R400 000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Balance at
-R1,2m -R250 000 R600 000 R1 400 000 R2 000 000 R2.4m
year end
Since the balance at the end of
Year 2 is positive, payback has Payback is not 2 years, as
been achieved in 1 Year, and payback is achieved during Year
____ months. The months are 2, therefore PP is 1 Year and a
calculated below. certain number of months.
To establish when during Year 2 Payback is achieved the following approach can be used:
R850 000
Monthly cash flow in Year 2 = = R70833.33&
12months
' Amount' needed for payback in Year 2 = R250 000 (closing balance of Year 1)
R250 000
∴ Payback month = = 3.529months
R70833.33& / month
∴ Payback Period is 1 year and 3.5months
An alternative approach, which yields the same answer is as follows:
' Amount' needed for payback in Year 2 = R250 000 (closing balance of Year 1)
Closing Balance of previous year
∴ Payback month = x12months
Cashflow of Payback Year
R 250000
∴ Payback month = x12months = 3.529months
R850000
∴ Payback Period is 1 year and 3.5months

Use the following three timelines to determine the Payback Period for Plants B to D. Plant
B’s timeline has the cash flows and closing balances pre-calculated, whereas Plants C & D
are blank.
Plant B----------------------------Payback is in ___________years and ____________ months
Cash flow -R1,2m

R800 000 R700 000 R700 000 R600 000 R500 000
Balance at
-R1,2m -R400 000 R300 000 R1 000 000 R1 600 000 R2.1m
year end
Plant C----------------------------Payback is in ___________years and ____________ months
Cash flow
Balance at
year end
Plant D----------------------------Payback is in ___________years and ____________ months
Cash flow
Balance at
year end
The plant with the shortest (quickest) PP is the most appropriate.

1.2 Return on Investment (ROI)

Return on investment is a determination of the amount of return received on the amount
invested, expressed as a percentage.
The formula is as follows:
Average Annual Profit
ROI = x100
Original Invsetment
Total Gains less Total Outlay
where Average Annual Profit =
Number of Years
Consider Plant A:
Description Calculation
a. Cash flow - Year 1 R 950,000.00
b. Cash flow - Year 2 R 850,000.00
c. Cash flow - Year 3 R 800,000.00
d. Cash flow - Year 4 R 600,000.00
e. Cash flow - Year 5 R 400,000.00
f. Total Gains (Sum of a. to e.): R 3 600,000.00
g. less Total Outlay (Investment) R 1 200,000.00
h. Profit (f. – g.): R 2 400,000.00
i. Number of years: 5
j. Average Annual Profit (h. / i.) R 480,000.00
k. ROI (j. / g. x 100) 40.0%
Plant B:
a. Cash flow - Year 1 R 800,000.00
b. Cash flow - Year 2 R 700,000.00
c. Cash flow - Year 3 R 700,000.00
d. Cash flow - Year 4 R 600,000.00
e. Cash flow - Year 5 R 400,000.00
f. Total Gains (Sum of a. to e.): R
g. less Total Outlay (Investment) R 1 200,000.00
h. Profit (f. – g.): R
i. Number of years: 5
j. Average Annual Profit (h. / i.) R
k. ROI (j. / g. x 100) %

Plant C:
a. Cash flow - Year 1 R
b. Cash flow - Year 2 R
c. Cash flow - Year 3 R
d. Cash flow - Year 4 R
e. Cash flow - Year 5 R
g. less Total Outlay (Investment) R
i. Number of years:

k. ROI (j. / g. x 100) %
Plant D:
a. Cash flow - Year 1 R
b. Cash flow - Year 2 R
c. Cash flow - Year 3 R
d. Cash flow - Year 4 R
e. Cash flow - Year 5 R
g. less Total Outlay (Investment) R
i. Number of years:

k. ROI (j. / g. x 100) %
The plant with the highest ROI is the most appropriate. However, it is important to
consider other investment instruments as well. For example, a ROI of 9% is not desirable,
as high returns are available through unit trusts, and other investment instruments (even a
savings account or call deposit may yield a higher return!).

1.3 Net Present Value (NPV)

By using a Discount Factor future cash flows are discounted to take into consideration
inflation. Simply put, R100 000-00 in five years time is less valuable than R 100 000-00
today. To determine the future value of cash flows, its is discounted (reduced) using a
Discount Factor.
In order to determine the Discount Factor, the ‘hurdle rate’, ‘discount rate’ or interest rate
must be determined, which is generally quite difficult. Your company, each month, should
have a defined hurdle rate, which is linked to the cost of capital (adjusted prime lending
rate associated with your company).
Once the hurdle rate / interest rate has been defined, the Discount Factor (DCF) per year
is established using the following formula:
1
Discount Factor =
(1 + i ) n
where i = interest rate and n = the period under review
For example, if you are required to determine the DCF for each year, for the next seven
years, using a fixed hurdle rate of 15%, the resultant DCF’s would be as follows:
Results DCF for the Year
Year Formula (correct to four decimal
places)
1
0 DCF = 1.0000
(1 + 0.15) 0
1
1 DCF = 0.8696
(1 + 0.15) 1
1
2 DCF = 0.7561
(1 + 0.15) 2
1
3 DCF = 0.6575
1.15 x1.15 x1.15
1
4 DCF = 0.5718
(1.15) 4
1
5 DCF = 0.4972
(1.15) 5
1
6 DCF = 0.4323
(1.15) 6
1
7 DCF = 0.3759
(1.15) 7
To determine the Discounted Cash Flow for a particular year, simply multiply the DCF by
the Cash Flow. For example, if the hurdle rate is 15%, and the Cash Flow of Year 4 is
R100 000-00, the discounted cash flow would be R100 000-00 x 0.5718 = R57 180-00.
Subsequently the R100 000-00 lost R48 280-00 of its value over four years.

Consider Plant A:
Interest Rate = 20% Cash Flow DCF Discounted Cash Flow
Investment – Year 0 - R 1,200,000.00 1.0000 R -1,200,000.00
Cash flow – Year 1 R 950,000.00 0.8333 R 791,635.00
Cash flow – Year 2 R 850,000.00 0.6944 R 590,240.00
Cash flow – Year 3 R 800,000.00 0.5787 R 462,960.00
Cash flow – Year 4 R 600,000.00 0.4823 R 289,380.00
Cash flow – Year 5 R 400,000.00 0.5674 R 226,960.00

Net Present Value: R 1,094,975.00
By using a financial calculator, or the NPV function on a spreadsheet, the more accurate
answer yielded would be R 1,095,010.29. The reason for the discrepancy is that the
financial calculator nor the spreadsheet round-off the DCF. Some spreadsheets use as
many as 16 decimal points!
Plant B:
Investment – Year 0 - R 1,200,000.00 1.0000
Cash flow – Year 1 R 800,000.00 0.8333
Cash flow – Year 2 R 700,000.00 0.6944
Cash flow – Year 3 R 700,000.00 0.5787
Cash flow – Year 4 R 600,000.00 0.4823
Cash flow – Year 5 R 500,000.00 0.5674

Net Present Value:
Plant C:
Investment – Year 0
Cash flow – Year 1


Net Present Value:

Plant D:
Investment – Year 0

Net Present Value:
The plant with the highest NPV is the most appropriate. A negative NPV is possible.
1.4 Internal Rate of Return

IRR, as a percentage, occurs where NPV = 0. As a rule, the IRR that a project yields must
be greater than the cost of capital. For example, if a company lends funds at a rate of
18% p.a. to finance a project, and the IRR of the project yields 16%, the project should not
commence, as the cost of capital is greater than the internal rate of return.
The formula to determine IRR is highly complex, consequently the most appropriate way to
determine IRR is by means of a Financial Calculator, or a spreadsheet, using the IRR
function.
If these options are not available, IRR can be established through trial and error by
determining the NPV of a project, using various hurdle rates, until the NPV yields a zero
(or close to a zero). Alternatively, two or three NPV’s can be established and plotted on a
graph and joined by a straight line. Where the line cuts the X axis (i.e. NPV = R0), you can
read off the IRR percentage.
The highest IRR is the desired option.
Consider Plant A
To determine the IRR of Plant A, without the use of a Financial Calculator / Spreadsheet,
we start by choosing a hurdle rate. Since the hurdle rate of 20% yielded a NPV (see page
7) of R 1,095,010.29 we can deduce that this is too high (i.e. its no where near zero!). Let
us consider a hurdle rate of 40%:


Investment – Year 0 - R 1,200,000.00 1 R -1,200,000.00
Cash flow – Year 1 R 950,000.00 0.7143 R 678,585.00
Cash flow – Year 2 R 850,000.00 0.5102 R 433,670.00
Cash flow – Year 3 R 800,000.00 0.3644 R 291,520.00
Cash flow – Year 4 R 600,000.00 0.2603 R 156,180.00
Cash flow – Year 5 R 400,000.00 0.1859 R 74,360.00
Net Present Value: R 434,315.00
The NPV of R 434,315.00 at a 40% hurdle rate is still far from zero. Let us try a hurdle
rate of 80%:
Cash flow – Year 1 R 950,000.00 0.5556 R 527,820.00
Cash flow – Year 2 R 850,000.00 0.3086 R 262,310.00
Cash flow – Year 3 R 800,000.00 0.1715 R 137,200.00
Cash flow – Year 4 R 600,000.00 0.0953 R 57,180.00
Cash flow – Year 5 R 400,000.00 0.0529 R 21,160.00
Net Present Value: R -194,330.00
The NPV of –R 194,330.00 at a 80% hurdle rate, although negative, is closer to zero. Let
us try a hurdle rate of 60%:
Cash flow – Year 1 R 950,000.00 0.625 R 593,750.00
Cash flow – Year 2 R 850,000.00 0.3906 R 332,010.00
Cash flow – Year 3 R 800,000.00 0.2441 R 195,280.00
Cash flow – Year 4 R 600,000.00 0.1526 R 91,560.00
Cash flow – Year 5 R 400,000.00 0.0954 R 38,160.00
Net Present Value: R 50,760.00
The NPV of R 50,760.00 at a 60% hurdle rate is the closest to a NPV of zero so far. Let
us try a hurdle rate of 65%:


Investment – Year 0 - R 1,200,000.00 1
R -1,200,000.00
Cash flow – Year 1 R 950,000.00 0.6061
R 575,795.00
Cash flow – Year 2 R 850,000.00 0.3673
R 312,205.00
Cash flow – Year 3 R 800,000.00 0.2226
R 178,080.00
Cash flow – Year 4 R 600,000.00 0.1349
R 80,940.00
Cash flow – Year 5 R 400,000.00 0.0818
R 32,720.00
Net Present Value: -R 20,260.00
The NPV of –R 20,260.00 at a 65% hurdle rate is even closer to a NPV of zero than the
hurdle rate of 60%. Consequently we can say that the IRR is between 60% and 65%, but
closer to 65%.
In fact the IRR is 63.52% if computed on a spreadsheet.
The other way of determining the IRR is by means of a graph. Using the previously
calculated NPV’s at hurdle rates of 20% (see page 7) and 40% (see page 9) we have R
1,094,975.00 and R 434,315.00 respectively.
R1.5m NPV of R 1,094,975.00

at 20% hurdle rate
R1.0m NPV of R 434,315.00

at 40% hurdle rate
R0.5m
R0m
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
-R0.5m
-R1.0m IRR is
approximately 63%,
as this is where
NPV is zero
-R1.5m

2. Weighted Scoring Evaluation Model
2.1 Introduction
This model can be used to assist with scoring different projects against each other to help
determine which project to select. The nature of the weighting is largely non-financial, so
used in conjunction with a Numeric Scoring Model, the result can be very powerful.
2.2 Approach
The approach is as follows:
1. Determine factors of success across all the projects;
2. Weight each of the factors of success;
3. Score each project against the factors of success;
4. Determine the final score for each project.
2.3 Determining the Factors of Success

Begin by determining what factors would deem projects successful. Do not limit yourself
to only one project, but look at the outcome of projects holistically. Ensure that all
stakeholders are in agreement with these Factors of Success. The following are
examples:
1. Profit Maximisation;
2. Utilisation of the workforce;
3. Utilisation of resources;
4. Increase of market share;
5. Ability to enter new markets;
6. Improvement of the company's image;
7. Satisfaction of stakeholders' needs;
8. Degree of certainty;
9. Congruence with company expertise and ability;
10. Ease of achieving outcome.
Each factor can be expanded, for example 'Profit Maximisation', refers to 'To what degree
will the company's profits be maximised if this project is undertaken and proves
successful.'
2.4 Weighting the Factors of Success

The next step is to determine a common weighting for each of the Factors of Success. All
stakeholders must be in agreement of the assigned weightings. The higher the weighting
assigned to a factor, the greater the importance of that factor to the company and the
project's success. All weightings must sum to 1. For purposes of this example the
following weightings have been assigned:
1. Profit Maximisation ........................................................ 0.25

2. Utilisation of the workforce ............................................ 0.02
3. Utilisation of resources .................................................. 0.03
4. Increase of market share............................................... 0.08
5. Ability to enter new markets .......................................... 0.12
6. Improvement of the company's image........................... 0.10
7. Satisfaction of stakeholders' needs ............................... 0.20
8. Degree of certainty ........................................................ 0.05
9. Congruence with company expertise and ability ........... 0.10
10. Ease of achieving outcome ........................................... 0.05
2.5 Scoring of Each Project

The next step is to allocate a score for each project against the Success Factors. The
score should be between 1 and 10 (inclusive), where 1 means that the project will fare
poorly against that success factor, and 10, the project will fare well against that criteria.
The following scores were allocated for three projects:
Success Factors Project A Project B Project C
1. Profit Maximisation 3 6 3
2. Utilisation of the workforce 5 5 8
3. Utilisation of resources 8 6 8
4. Increase of market share 3 8 6
5. Ability to enter new markets 2 7 7
6. Improvement of the company's
5 8 8
image
7. Satisfaction of stakeholders' needs 6 5 3
8. Degree of certainty 1 3 6
9. Congruence with company
9 6 5
expertise and ability
10. Ease of achieving outcome 8 4 7

2.6 Score For Each Project

To determine the final score for each project, one must multiply the project's scores for
each factor, by the weight for that factor. Next, add up these totals, as follows:
Project A Project B Project C
Success Factors Weight Weight Weight Weight
Score ed Score ed Score ed
Score Score Score
1. Profit Maximisation 0.25 3 0.75 6 1.50 3 0.75

2. Utilisation of the workforce 0.02 5 0.10 5 0.10 8 0.16
3. Utilisation of resources 0.03 8 0.24 6 0.18 8 0.24
4. Increase of market share 0.08 3 0.24 8 0.64 6 0.48
5. Ability to enter new markets 0.10 2 0.20 7 0.70 7 0.70
6. Improvement of the company's
0.12 5 0.60 8 0.96 8 0.96
image
7. Satisfaction of stakeholders' needs 0.20 6 1.20 5 1.00 3 0.60
8. Degree of certainty 0.05 1 0.05 3 0.15 6 0.30
9. Congruence with company
0.10 9 0.90 6 0.60 5 0.50
expertise and ability
10. Ease of achieving outcome 0.05 8 0.40 4 0.20 7 0.35
Total: 1 4.68 6.03 5.04
Project B appears to be the most viable project.
3. Cost Breakeven Analysis

Occasionally companies establish a project to manufacture an item to fulfil a contractual
obligation or the demand for the item. In some instances the company may not have the
necessary equipment to manufacture the item and consequently may purchase and install
the necessary equipment. In doing this, the company may have various options to chose
from.
For example, a company needs to manufacture widgets for a period of time. The widgets
will sell for R250-00 each. To meet this demand, the company gets quotes from two
suppliers of Widget Making Machines, which look as follows:
Widgets-R-Us Widgets-4-Ever
Variable Cost Per Widget R 120.00 R 95.00
Fixed Costs per Month R 115,500.00 R 295,000.00

3.1 Break Even

First we can establish the break-even number of units per plant. The formula for
establishing break-even is as follows:
Fixed Costs
Break - even number of units =
Contribution per unit
where Contribution per Unit = Selling Price less Variable Cost per Unit
Description Widgets-R-Us Widgets-4-Ever

a. Selling Price per Unit R 250.00 R 250.00
b. Variable Cost per Unit R 120.00 R 95.00
c. Contribution per Unit (a. – b.) R 130.00 R 155.00
d. Fixed Costs R115,500.00 R295,000.00
e. Break-even number of units (d. / c.) 888* 1903*
* Break-even number of units are always rounded off downward.
3.2 Point of Alternation / Swing Point

It is now necessary to determine which plant is best to chose based on the number of units
demanded. This is determined by the swing rate: when a certain number of units are
demanded, both options may be profitable, however, one plant may be more profitable
than the other.
The formula to determine the point at which to alternate from one plant to the other is as
follows:
Difference in Fixed Costs
Swing point =
Difference in Contribution
Consider the following:
Difference in Fixed Costs R 295000 − R115500 179500
Swing point = = =
Difference in Contribution R155 − R130 25
∴ Swing point = 7180units
In summary:
a. If 700 units are demanded, the project should not commence, as neither plant will
generate a profit;
b. If 1000 units are demanded, the project should commence using the Widgets-R-
Us plant (as 1000 > 888, the breakeven of Widgets-R-Us). However, if the
Widgets-4-Ever plant was used, a loss would result, as 1000 units less than the
breakeven of this latter plant.
c. If 2000 units are demanded, the project should commence using the Widgets-R-
Us plant, as this is less than the swing point of 7180 units. If the Widgets-4-Ever
plant was used, a profit would be generated, by less so than if the Widgets-R-Us
plant were used. The following table proves this:

Selling Price R250.00 R250.00
Number of units demanded and sold 2000 2000
Income (Number of Units x Selling
R500,000.00 R500,000.00
Price
Fixed Costs (R115,500.00) (R295,000.00)
Variable Cost per Unit R120.00 R95.00
Number of Units 2000 2000
Variable Costs (Number of units x
(R240,000.00) (R190,000.00)
Variable Cost per unit)
Total Costs (Fixed Costs plus Variable
(R355,500.00) (R485,000.00)
Costs)
Profit / Loss (Income less Total Costs) R144,550.00 R15,000.00
d. If 6000 units are demanded, the project should commence using the Widgets-R-
Us plant, as this is less than the swing point of 7180 units. If the Widgets-4-Ever
plant was used, a profit would be generated, by less so than if the Widgets-R-Us
plant were used. The following table proves this:
R1,500,000.00 R1,500,000.00
Price
Fixed Costs (R115,500.00) (R295,000.00)
(R720,000.00) (R570,000.00)
(R835,500.00) (R865,000.00)
Costs)
Profit / Loss (Income less Total Costs) R664,500.00 R635,000.00
e. If 9000 units are demanded, the project should commence using the Widgets-4-
Ever plant, as this is greater than the swing point of 7180 units. If the Widgets-R-
Us plant was used, a profit would be generated, by less so than if the Widgets-4-
Ever plant were used. The following table proves this:

R2,250,000.00 R2,250,000.00
Price
Fixed Costs (R115,500.00) (R295,000.00)
(R1,080,000.00) (R855,000.00)
(R1,195,500.00) (R1,150,000.00)
Costs)
Profit / Loss (Income less Total Costs) R1,054,500.00 R1,100,000.00
4. Class Work Example
4.1 Financial-Numerical Models

Using the information below, determine the PP, ROI, NPV and IRR for the following three
projects:
Project Tetra Project Zeus Project Omega
Investment R 100,000.00 R 150,000.00 R 200,000.00
Savings – Year 1 R 20,000.00 R 50,000.00 R 70,000.00
Savings – Year 2 R 30,000.00 R 50,000.00 R 65,000.00
Savings – Year 3 R 40,000.00 R 50,000.00 R 55,000.00
Savings – Year 4 R 55,000.00 R 50,000.00 R 35,000.00
Savings – Year 5 R 65,000.00 R 50,000.00 R 25,000.00

Use a hurdle rate of 15%.
4.2 Break-Even Analysis

Example 1: Using the information below to answer the ensuing questions:
Description Option A Option B
Selling Price per Unit R 350.00 R 350.00
Variable Cost per Unit R 200.00 R 150.00
Fixed Costs R115,500.00 R295,000.00
Question i: If the demand is for 500 units, what would you do?
Question ii: If the demand is for 1000 units, what would you do?
Question iii: If the demand is for 1400 units, what would you do?
Question iv: If the demand is for 2100 units, what would you do?
Question v: If the demand is for 4000 units, what would you do?
Example 2: Using the information below to answer the ensuing questions:

Description Option C Option D
Selling Price per Unit R 350.00 R 350.00
Variable Cost per Unit R 200.00 R 200.00
Fixed Costs R115,500.00 R295,000.00
Question vi: If the demand is for 500 units, what would you do?
Question vii: If the demand is for 1000 units, what would you do?
Question viii: If the demand is for 1400 units, what would you do?
Question ix: If the demand is for 2200 units, what would you do?
Question x: If the demand is for 4000 units, what would you do?


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Lecture 3 Project Selection Introduction

Introduction to Project Selection

• Payback Period (PP)

1. Financial & Numerical Models

Copyright © 2003 Norwin Lederer PMP® Page 1 of 17

1.1 Payback Period (PP)

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Copyright © 2003 Norwin Lederer PMP® Page 2 of 17

Plant B----------------------------Payback is in ___________years and ____________ months

Cash flow -R1,2m

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Plant C----------------------------Payback is in ___________years and ____________ months

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Plant D----------------------------Payback is in ___________years and ____________ months

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

The plant with the shortest (quickest) PP is the most appropriate.

Copyright © 2003 Norwin Lederer PMP® Page 3 of 17

1.2 Return on Investment (ROI)

k. ROI (j. / g. x 100) 40.0%

Copyright © 2003 Norwin Lederer PMP® Page 4 of 17

j. Average Annual Profit (h. / i.) R

j. Average Annual Profit (h. / i.) R

Copyright © 2003 Norwin Lederer PMP® Page 5 of 17

1.3 Net Present Value (NPV)

Copyright © 2003 Norwin Lederer PMP® Page 6 of 17

Cash flow – Year 1 R 950,000.00 0.8333 R 791,635.00

Cash flow – Year 2 R 850,000.00 0.6944 R 590,240.00

Cash flow – Year 3 R 800,000.00 0.5787 R 462,960.00

Cash flow – Year 4 R 600,000.00 0.4823 R 289,380.00

Cash flow – Year 5 R 400,000.00 0.5674 R 226,960.00

Cash flow – Year 1 R 800,000.00 0.8333

Cash flow – Year 2 R 700,000.00 0.6944

Cash flow – Year 3 R 700,000.00 0.5787

Cash flow – Year 4 R 600,000.00 0.4823

Cash flow – Year 5 R 500,000.00 0.5674

Cash flow – Year 1

Cash flow – Year 3

Cash flow – Year 4

Copyright © 2003 Norwin Lederer PMP® Page 7 of 17

Cash flow – Year 1

Cash flow – Year 2

Cash flow – Year 3

Cash flow – Year 4

1.4 Internal Rate of Return

Copyright © 2003 Norwin Lederer PMP® Page 8 of 17

Interest Rate = 40% Cash Flow DCF Discounted Cash Flow

Net Present Value: R -194,330.00

Cash flow – Year 1 R 950,000.00 0.625 R 593,750.00

Cash flow – Year 2 R 850,000.00 0.3906 R 332,010.00

Cash flow – Year 3 R 800,000.00 0.2441 R 195,280.00

Cash flow – Year 4 R 600,000.00 0.1526 R 91,560.00

Cash flow – Year 5 R 400,000.00 0.0954 R 38,160.00

Net Present Value: R 50,760.00

Copyright © 2003 Norwin Lederer PMP® Page 9 of 17

Interest Rate = 65% Cash Flow DCF Discounted Cash Flow

R1.5m NPV of R 1,094,975.00

R1.0m NPV of R 434,315.00

Copyright © 2003 Norwin Lederer PMP® Page 10 of 17

2. Weighted Scoring Evaluation Model

2.3 Determining the Factors of Success

2.4 Weighting the Factors of Success

1. Profit Maximisation ........................................................ 0.25

2.5 Scoring of Each Project

Plant B----------------------------Payback is in _years and __ months

Plant C----------------------------Payback is in _years and __ months

Plant D----------------------------Payback is in _years and __ months