1. Which Projects would you recommend Handstar pursue based on the NPV approach and why? (15 marks) 2. Assume the founders weigh a project’s NPV twice as much as obtaining/retaining a leadership position and making use of the Internet. Use the weighted factor scoring method to rank these projects. Which projects would you recommend Handstar pursue? (10 marks) 3. In your opinion, is it justified to hire an additional software development engineer for 50% of time (part-time)? Discuss this on the basis of the project evaluation carried out in question 1. (10 marks) The spreadsheet bellow summarizes the NPV calculations for the six projects assuming the development costs are incurred at the end of year zero and each product has a three-year life.
Since the six projects require a total of 13,025 development hours and only 10,000 hours are available, one or more projects will need to be postponed or eliminated from further consideration. If we start with the project with the highest NPV, the Browser project would be selected first requiring 1,875 hours of development time. Next, the Trip Planner would be selected requiring an additional 6,250 hours of development time. The project with the next highest NPV is the Spreadsheet project.
However, this project requires 2,500 hours and only 1,875 hours are available after selecting the Browser and Trip Planner projects. The project with the next highest NPV is the Calendar/Email project which requires 1,250 hours of development time leaving 625 hours available. Of the remaining projects, the Portfolio Tracker requires too many hours while the Expense Report project can be completed with the hours available. Thus, Browser, Trip Planner, Calendar/Email, and the Expense Report projects would be selected based on the NPV approach.
2. Assume the founders weigh a project’s NPV twice as much as both obtaining/retaining a leadership position and use of the Internet. Use the weighted factor scoring method to rank these projects. Which projects would you recommend Handstar pursue? Data is available for the six projects on these three criteria. Based on the information given in the question, we will assign a weight of 0.5 to NPV and 0.25 to both obtaining/retaining a leadership position and use of the Internet. In terms of scoring the options on NPV, a score of 1 was assigned to the projects with NPVs less-than-or-equal-to 1.1 million dollars. Likewise, a score of 2 was assigned to projects with NPVs that were greater than 1.1 million dollars but less-than-or-equal-to 2.5 million dollars.
Projects with NPVs greater than 2.5 million dollars were assigned a score of 3. For the other two criteria, projects with low probabilities were assigned a score of 1, moderate probabilities a score of 2, and high probabilities a score of 3. A spreadsheet for calculating the weighted scores is shown below. The only difference with the weighted scoring model is that the Calendar/Email project moves ahead of the Spreadsheet project. However, the same set of projects will be selected. In your opinion, is hiring an additional software development engineer justified? After selecting the Browser, Trip Planner, Calendar/Email, and the Expense Report projects, a total of 225 hours would be available.
Hiring an additional software engineer would increase the number of available hours to 2,725. Since the Spreadsheet project has a higher NPV and higher score than the Expense report project it would be the next project to select. Given that its NPV of $2,233,058 greatly exceeds the $133,000 ($52/hour 2500 hours/year) incremental cost of the new software development engineer, hiring an additional software engineer is justified. Indeed, the Expense Report’s NPV in excess of $500,000 would appear to justify hiring a second software development engineer as well.