1.

Discuss what each type of financial tool is (NPV, PI, ECV…), and what are the strengths and weaknesses of each tool.

NPV:(Net Present Value) is the difference between the present value of cash inflows and the present value of cash outflows over a
period of time. Calculating NPV is simple. If NPV is positive, we can decide to invest the projects. But it has lots of limitations, such as we
have to assume there is not limit on budget, and we also need to take the project duration to consideration because the money number
might worth less due to inflation. It is easy to tell which projects we shouldn't invest. It ignores probabilities and risks.

PI:(Productivity Index) tries to maximize financial value of the portfolio given certain constraints by using NPV/Development Cost. It
considers both technical and commercial success but it ignores risks and probabilities. If we choose the the projects to go from the
highest rank, we usually can't exhaust budget so that we don't get an optimal solution.

ECV: (Expected Commercial Value) tries to maximize the commercial value of portfolio given certain budget constraints. The calculation
process includes risk and probabilities, and it considers both technical and commercial success by introducing development and
commercial costs. The decision process is also incremental that it considers monetary worth along with time. The major weakness is
that it is based on extensive data, so that all the data should be available and accurate for all the different projects. This results in the
estimation usually being unreliable.

2. Calculate and fill in the table balnks, place your decision of "GO" or "KILL" under each scenario.

Scenario 1
Present Development Commercialization
Scenario 1 Net Present Value Ranking Decision
Value Cost Cost
Zulu 30 3 2 25 3 GO
Alpha 2 2 1 -1 8 KILL
Tango 4 0.5 0.75 2.75 6 GO
Beta 5 3 2 0 7 KILL
Sierra 42 4.5 8 29.5 2 GO
Echo 10 7 5 -2 9 KILL
Romeo 27 4 2 21 4 GO
Oscar 8 1 0.5 6.5 5 GO
Lima 69 10 5 54 1 GO

Scenario 2 (25M Total Budget)

Net Present Development NPV Commercialization
Scenario 2 Sum of Costs Ranking Decision Solver Decision
Value Cost Productivity Index Cost Profit Cost
Zulu 25 3 8.333 2 5 1 GO 1 63.75 20.25
Alpha -1 2 -0.500 1 3 9 KILL 0 88.25 22.75
Tango 2.75 0.5 5.500 0.75 1.25 4 GO 1
Beta 0 3 0.000 2 5 7 KILL 0
Sierra 29.5 4.5 6.556 8 12.5 2 KILL 0
Echo -2 7 -0.286 5 12 8 KILL 0
Romeo 21 4 5.250 2 6 6 KILL 0
Oscar 6.5 1 6.500 0.5 1.5 3 GO 1
Lima 54 10 5.400 5 15 5 GO 1

Scenario 3 (25M Total budget)

Probability of Value if Value if Expected Value Expected Value Expected
Present Development Commercialization Probablity of Expected Value ECV
Scenario 3 Technical Commericial Technical before in Commercial Sum of Costs Ranking Decision Solver
Value Cost Cost Commercial Success before Launch PI
Success Failure Failure Commercialization Development Value
Zulu 30 3 2 56% 41% 0 0 16.8 14.8 6.1 3.1 1.0 5.0 2 GO 1
Alpha 2 2 1 34% 79% 0 0 0.7 -0.3 -0.3 -2.3 -1.1 3.0 7 KILL 0
Tango 4 0.5 0.75 54% 56% 0 0 2.2 1.4 0.8 0.3 0.6 1.3 5 KILL 0
Beta 5 3 2 58% 34% 0 0 2.9 0.9 0.3 -2.7 -0.9 5.0 8 KILL 0
Sierra 42 4.5 8 58% 64% 0 0 24.4 16.4 10.5 6.0 1.3 12.5 1 GO 1
Echo 10 7 5 45% 76% 0 0 4.5 -0.5 -0.4 -7.4 -1.1 12.0 9 KILL 0
Romeo 27 4 2 37% 71% 0 0 10.0 8.0 5.7 1.7 0.4 6.0 3 GO 1 ECV Cost
Oscar 8 1 0.5 43% 42% 0 0 3.4 2.9 1.2 0.2 0.2 1.5 6 GO 1 10.9461 25
Lima 69 10 5 31% 65% 0 0 21.4 16.4 10.7 0.7 0.1 15.0 4 KILL 0

Scenario 4 (17M Total Budget)

Probability of Value if Value if Expected Value Expected Value Expected
Present Development Commercialization Probablity of Expected Value ECV
Scenario 4 Technical Commericial Technical before in Commercial Sum of Costs Ranking Decision Solver
Value Cost Cost Commercial Success before Launch PI
Success Failure Failure Commercialization Development Value
Zulu 30 3 2 46% 41% 0.0 0.0 13.8 11.8 4.8 1.8 0.6 5.0 2 GO 1
Alpha 2 2 1 34% 69% 0.0 0.0 0.7 -0.3 -0.2 -2.2 -1.1 3.0 7 KILL 0

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 Tango 4 0.5 0.75 44% 56% 0.0 0.0 1.8 1.0 0.6 0.1 0.1 1.3 5 GO 1
Beta 5 3 2 58% 34% 0.0 0.0 2.9 0.9 0.3 -2.7 -0.9 5.0 8 KILL 0
Sierra 42 4.5 8 48% 54% 0.0 0.0 20.2 12.2 6.6 2.1 0.5 12.5 1 KILL 0
Echo 10 7 5 35% 66% 0.0 0.0 3.5 -1.5 -1.0 -8.0 -1.1 12.0 9 KILL 0
Romeo 27 4 2 37% 71% 0.0 0.0 10.0 8.0 5.7 1.7 0.4 6.0 3 GO 1
Oscar 8 1 0.5 43% 32% 0.0 0.0 3.4 2.9 0.9 -0.1 -0.1 1.5 6 KILL 0 ECV Cost
Lima 69 10 5 31% 65% 0.0 0.0 21.4 16.4 10.7 0.7 0.1 15.0 4 KILL 0 3.5765 12.3

3. Based on the decision made above, discuss the similarities and differences in thouse outcomes.

In Scenario 1, we just simply made the go/kill decision based on NPV. If we get positive number for NPV, we then
approve the projects, otherwise we decline the projects.

In Scenario 2, we introduced budget constraint. We ranked the projects based on NPV PI. As we can tell from
Scenario 2 that if we had negative NPV, we won't pick up the projects with/without introducing PI. Because we
want to maximize the profit given the budget, we can not simply pick up projects based on PI ranking, otherwise
we might not be able to exhaust our budget.

In Scenario 3 and 4, we can see that if the project has a negative NPV, we also won't pick it up in ECV method
either. The data and calculation process for 3 and 4 is same, however, the budget and probability is different, so
that we got very different selections. We can tell that the output of the increamental calculating process is impact
by the technical and commercial success probabilities.

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