Weighted scoring model and net present value

How are candidate new product and service projects reviewed and prioritized in a typical company? Let's take another case, the Seitz Company, a manufacturing and distribution company facing the issue of whether to fund a new plant equipment project or build a completely new plant in Huntsville, Alabama.

First we will use the weighted scoring model to see how the two projects measure up to the strategic objectives of the company, and then we will use the net present value analysis to estimate the financial performance of the projects. These two tools are typically used to help make the business case for a new product; a high score in the weighted scoring model means that the new product or project will support the direction the company is going; a high score in the net present value analysis means that at the discount rate chosen, the so-called hurdle rate for investments in that firm, the project will produce a return above what could be returned from an investment that breaks even at that discount rate.

Let's say that the Seitz Corporation is in the process of selecting major investment programs for the 1996-1997 period. A total of $3,000,000 remains available for projects during this period. One selection remains and will be made from two candidate projects, which have been culled over from over a dozen new product and new project proposals. Two new product ideas are generated:

Project 1

Name: New Equipment Submitted by:

■ Steve Pokorski, Vice President of Operations

■ Joe Downs, Director of Plant Engineering

Project description:

The project would focus on the replacement of the extrusion equipment in the West Milwaukee plant. The proposed new equipment is to be manufactured based on a prototype designed and built in Down's developmental facility. All existing equipment had been acquired from three major suppliers. Pokorski authorized the prototype because he felt that the suppliers had become unresponsive to Seitz's bid requests. The technical superiority of the new type of equipment will allow for significant improvements in productivity.

Project 2

Name: New Huntsville Plant Submitted by:

■ Janis Clark, Vice President of Marketing Project description:

This project proposes to establish a new plant in Huntsville, Alabama. During the last three years, sales have been steadily increasing in the area to the point where Seitz has achieved third place in the market share. Clark claims that the market is extremely price sensitive and Seitz's more efficient production capacity would ensure quick attainment of the second position if transportation costs to markets in the southeast were lowered.

Part of the evaluation is based on the strategic objectives the leadership provided. Table 2-10 shows the weighted scoring of each objective—the weighted value of each objective and how each project performs against that objective. Each objective is first assigned a percent by making judgments on what relative weight to give each objective—assuming they are not all of equal value.

The second part of the evaluation is based on the net present Value Model that lists the return over the next five years utilizing a NPV factor at 12 percent. The first year cost is the cost of producing the project, e.g., the cost of plant equipment improvement in the case of project #1, and the cost of building a new plant for project #2. Then a forecast is made of net income that will be produced each year over the next five years; net income is the sum of all costs and revenues by year. Then each net income value is discounted by the chosen discount rate using a new present value table.

TABLE 2-10 Weighted Scoring Model

Priority

Company strategic objectives

Weight assigned to strategic objective

Score project

1 new equipment against objective

Score project 2 new plant against objective

Composite index project 1 (percent X score)

Composite index project 2 (percent X score)

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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