1.

A four-year financial project is forecast to have net cash inflows of $20,000; $25,000;
$30,000; and $50,000 in the next four years. It will cost $75,000 to implement the project,
payable at the beginning of the project. If the required rate of return is 0.2, conduct a
discounted cash flow calculation to determine the NPV.
In order to answer this question, the student needs to discount the cash flows in years 1
through 4 ($20,000, $25,000, $30,000 and $50,000 respectively) to the present using a 30%
discount rate and compare this value with the initial outflow of $75,000. Using the NPV Excel
formula gives the following analysis:

A B C D E
1 Req Rate of Return 20.0%
2
3 Year Cash Flow
4 0 -$75,000
5 1 $20,000
6 2 $25,000
7 3 $30,000 =B4+NPV(B1,B5:B8)
8 4 $50,000
9 NPV $502

2. A town’s council has established a project team to select a project to improve local
services for their citizens. Use a weighted scoring model to analyze three possible projects
(A, B, C) for improving their services. The relative weights for each criterion are shown in
the following table. A score of 1 represents unfavorable, 2 satisfactory, and 3 favorable.

This exercise requires that the student set up a matrix as indicated below:
As shown in the spreadsheet above, project C is the best location based on the weighted
scores (i.e., it has the highest value).

Note: These weights happen to sum to 100 but this is not necessary. Of course, when the
weights are normalized they must sum to 100 except for rounding errors.

3. (a) Compare your answer in Exercise 2 to the answer you would have found if you had
used an unweighted, 0-1 scoring model. Assume that a score of 1 means does not qualify
and a 2 or 3 means it does qualify.

As shown below, that would result in a score of five for all three projects.

Project
Category A B C
Project costs x x
Timely completion x x
Service quality x x
Contractor relations x x x
Affordability x
Citizen satisfaction x x
Count relations x x x

Count 5 5 5

(b) Next, revise the unweighted model by deleting all categories that, as recommended, have
a weight of less than 20 percent. Compare to your answer to (a) above and also Exercise 2.
Which method seems best?

Deleting all categories that have a weight of less than 20 percent result in selecting B with a
count of three, as shown below.
 Location
Category A B C
Project costs x x
Timely completion x x
Citizen satisfaction x x

Count 1 3 2
4. Using a spreadsheet for Exercise 2, find the following: (a) What would be your
recommendation if the weight for the transportation cost went down to 10 and the
weight for union relations went up to 25?

The spreadsheet can be modified by changing the two weightings as follows:

• The entry in cell B5 is changed from 10 to 25, and

The result of these changes is changes results in project A having a score of 195, project B a
score of 225, and project C a score of 210. Project B, therefore, is the preferred project.

(b) Suppose location A received a score of 3 for transport cost and location C received a score
of 2 for transport cost. Would your recommendation change under these circumstances?

The spreadsheet can be modified by changing the two evaluations as follows:

• The entry in cell C7 is changed from 1 to 3, and

Making these changes results in project A having a score of 215, project B a score of 210, and
project C a score of 200. Project C is, therefore, the preferred location.

(c) The Mayor has looked at your scoring model and feels that tax considerations should be
included in the model with a weight of 15. In addition, the Mayor has scored the locations on
tax considerations as follows: A-3, B-2, and C-1. How does this affect your recommendation?

The spreadsheet shown in Exercise 2 can be modified as shown below by adding a new row for
tax considerations. According to the results shown below, including tax considerations results
in projects B and C both having an identical score of 240.
23. Nina has been asked to lead a team that has been tasked with finding a new location for
a boutique concept her company would like to test. The team has identified four
candidate shopping centers to locate the new boutique in. Some cater to a higher class of
clientele than others, some are in an indoor mall, some have a much greater volume than
others, and, of course, rent varies considerably…

Based on the information provided, Nina believes that Clientele is the most important
factor. We therefore somewhat arbitrarily assign this factor a weight of 100. Next, Rent is
estimated to be 90% as important as Clientele so it is assigned a weight of 90 (100  .90).
The weights for Indoor mall and Volume are 85.5 (90  .95) and 72 (90  .80), respectively,
and are calculated in a similar fashion.

According to the results shown in the spreadsheet below, Nina should select Location 1
since it has the highest score.

A B C D E F
1
2 Location
3 Weight 1 2 3 4
4 Clintele 100 2 3 1 3
5 Rent 90 3 2 1 3
6 Indoor 85.5 3 1 3 1
7 Volume 72 3 2 3 1
8
9 Score 942.5 709.5 662.5 727.5
10
11
12 =SUMPRODUCT($B4:$B7,C4:C7)
13 copy to cells D9:F9
14

6. Using a spreadsheet for Exercise 5, determine how Nina’s ability to negotiate a lower rent
at location 3, thereby raising its ranking to “good,” will affect the overall rankings of the
four locations.

Using the spreadsheet for Exercise 5 and changing cell E5 from 1 to 3 increases the score of
Location 3 from 662.5 to 842.5 and thus from having the lowest score to the second highest
score.

Note: since the scores for the other three locations are not impacted by this change, the overall
recommendation (location 1) remains unchanged.