A project selection committee is comparing two proposals to see which proposal it will support.
Proposal A is for a project that will require the enterprise to invest its own money over a three year period of time. It is estimated that in Years 4, 5, and 6, the company can generate revenues from the deliverable produced by the project in the manner described in the table below.
Proposal B is for a cost-reimbursable contracted project executed for a client. Expenses are reimbursed as the project is carried out, so it requires little up front investment by the enterprise.
Proposal A: Self-funded Project
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
|
Revenue
|
0
|
0
|
0
|
800
|
800
|
800
|
|
Expense
|
300
|
400
|
300
|
0
|
0
|
0
|
Proposal B: Contracted, Cost-Reimbursable Project
|
|
Year 1
|
Year 2
|
Year 3
|
Year 4
|
Year 5
|
Year 6
|
|
Revenue
|
0
|
220
|
330
|
440
|
320
|
0
|
|
Expense
|
200
|
300
|
400
|
200
|
0
|
0
|
1. What is the profit associated with the project carried out in Proposal A? Proposal B?
2. When does payback occur on the project carried out in Proposal A? Proposal B?
3. What is the present value of revenue for the project carried out in Proposal A? Proposal B? (In computing present value, do not discount the value for the first year being examined. Assume i = .08)
4. What is the present value of expense for the project carried out in Proposal A? Proposal B? (In computing present value, do not discount the value for the first year being examined.)
5. What is net present value for the project described in Proposal A? Proposal B? (In computing present value, do not discount the value for the first year being examined.)
6. What is the internal rate of return for the project described in Proposal A? Proposal B?
7. If you could only support one of these projects, which one would it be?
Explain your rationale.