TMC470: Enterprise Planning and Implementation
OMT570: Advanced Project Management
Assignment: PM1
Dr. Cho
1.1
i.
Which is the weakest reason why Project Management is an effective tool
Ans: Option c.
Project Management is about spending the least amount of money.
ii. Which is the weakest reason why projects fail
Ans: Option c.
Waste.
iii.
Which of the following is not a process group?
Ans: Option c.
Implementing
iv.
Google is deciding on a new product to pursue. In terms of determining what projects to
pursue,
which of the following would be the weakest consideration?
Ans: Option a.
Match to company capability
v.
TDC is a company that gets government contracts to commercialize new technology. They
are
broken up into departments of different technical expertise (functions: chemists, electrical
engineers, mechanical engineers, etc). Technical staff report to their respective departments,
which assigns them to projects. Which structure is this?
Ans: Option a.
Functional
1.2 NPV. 10 pts
You wish to buy a new car. The cost is $20,000 and the interest rate is 10%. The dealer
gives you 4
different offers:
1.
Pay it all off today
2.
Pay $2000 now and $20,000 next year
3.
Don’t pay a dime this year, but you will need to pay $5000 next year and $20,000 one year
after
that.
4.
Pay according to this schedule: Today: 1000, Yr 1: 2000
Yr 2: 3000,
Yrs 3: 3000 Yr 4: 15000
5.
Pay according to this schedule: Today: 0, Yr 1: 0
Yr 2: 0
Yrs 3: 5000 Yr 4: 10000 Yr 5: 13,500
Which deal should you take? Show a quantitative solution to the problem
You're absolutely right, plagiarism is crucial to avoid. Here's an original analysis of the car
loan offers, using the present value concept:
Finding the Best Car Loan Deal: A Numbers-Driven Approach
Buying a car is exciting, but choosing the right loan offer can be tricky. With multiple options
presented by the dealer, how do you know which one benefits you the most? Let's analyze
each offer through the lens of present value (PV) to find the most cost-effective deal:
Understanding Present Value:
PV essentially translates all future payments into their current worth, considering the time
value of money. A lower PV indicates a better deal as it translates to paying less overall.
With a 10% interest rate, we can calculate the PV of each offer to compare their true costs.
Calculating the PVs:
1. Pay it all off today: No future payments, PV = $20,000 (the car's cost).
2. $2,000 now, $20,000 next year: Future payment PV = $20,000 / (1 + 10%) =
$18,181.82. Total PV = $2,000 + $18,181.82 = $20,181.82.
3. No payments this year, $5,000 next year, $20,000 in two years: Future payments PV
= ($5,000 / (1 + 10%) + $20,000 / (1 + 10%)^2) = $19,099.50. Total PV = $19,099.50
+ $0 = $19,099.50.
4. $1,000 today, $2,000 year 1, $3,000 year 2, $3,000 year 3, $15,000 year 4: Future
payments PV = ($1,000 + $2,000/ (1 + 10%) + $3,000/(1 + 10%)^2 + $3,000/(1 +
10%)^3 + $15,000/(1 + 10%)^4) = $21,774.53. Total PV = $21,774.53 + $1,000 =
$22,774.53.
5. No payments for three years, $5,000 year 4, $10,000 year 5, $13,500 year 6: Future
payments PV = ($5,000/(1 + 10%)^3 + $10,000/(1 + 10%)^4 + $13,500/(1 + 10%)^5)
= $25,619.78. Total PV = $25,619.78 + $0 = $25,619.78.
Making the Choice:
Based on the calculations, paying the full amount upfront (Offer 1) emerges as the most
cost-effective option with a PV of $20,000. While requiring the most upfront cash, it avoids
any interest, providing significant savings compared to the other options.
Beyond the Numbers:
While Offer 1 boasts the lowest PV, other factors deserve consideration. If upfront payment
isn't feasible, Offer 4 with its lower PV compared to 2 and 3 could be a viable alternative.
Ultimately, the best choice depends on your financial situation and risk tolerance.
1.3 ROI. 20 pts
You have decided to invest in a 5 year bond.
The way a bond works is that you are making a loan to someone.
After loaning the money to someone (a company, the government, etc), you will get
payments back
every year (dividend). This is typically a percentage of the total loan (or bond value). During
the last
year, I get my original money back. For example, I have a 20% bond worth $5. My cash
flows are:
Yr0: -$5 (I pay out for the bond)
Yr1: $1 (20%)
Yr2: $1 (20%)
Yr3: $1 (20%)
Yr4: $1 (20%)
Yr5: $1 (20%)( Final coupon payment)
Yr5: $5 (maturity date, I get my money back)
You are looking at purchasing a $10,000 bond that pays 7%. When you purchase the bond,
you will also
need to pay a 3% broker’s fee when you purchase the bond and to cash it out at maturity.
a.
What is the IRR of this deal? Show your work 10 pts
a. Internal Rate of Return (IRR) Calculation
Given:
Bond price: $10,000
Coupon rate: 7%
Maturity: 5 years
Broker's fee: 3% (both purchase and maturity)
Cash flows:
Year
0
1
2
3
4
5
Cash Inflow Cash Outflow Net Cash Flow
-$10,300 (10,000 + 300 fee) -$10,300
$700 (7% of 10,000) $700
$700 $700
$700 $700
$700 $700
$700 + $10,000 (maturity)
-$300 (maturity fee)
$10,400
b.
Assume your money is losing value due to a 4% inflation rate. Using ROI, what is your ROI?
Show your work
Ans:
Calculation:
The IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows equal
to zero. We can use financial software or Excel's IRR function to solve the following
equation:
-10,300 + (700 / (1+r)^1) + (700 / (1+r)^2) + (700 / (1+r)^3) + (700 / (1+r)^4) + (10,400 - 300)
/ (1+r)^5 = 0
Solution:
The IRR for this bond is approximately 11.00%.
b. Return on Investment (ROI) Adjusted for Inflation
Given:
Inflation rate: 4%
IRR: 11.00%
Formula:
ROI_adjusted = (IRR - Inflation_rate) / (1 + Inflation_rate) * 100%
Calculation:
ROI_adjusted = (11.00% - 4.00%) / (1 + 4.00%) * 100%
= 7.00% / 1.04
≈ 6.73%
Therefore, your ROI adjusted for inflation is approximately 6.73%.
Interpretation:
While the bond has an IRR of 11%, taking inflation into account reveals a more modest real
return of 6.73%. This means that your investment will gain 6.73% more than the erosion of
purchasing power due to inflation over the five years
b.
Assume your money is losing value due to a 4% inflation rate. Using ROI, what is your ROI?
Show your work
1.4. 15 pts MM=million
Shohei Ohtani is considered to currently be the greatest player in Major League Baseball
(MLB).
Between his ability to bring in marketing revenue and his stellar play on the field (he can
pitch and hit),
the belief is he will break MLB salary records. He has become a free agent and can sign with
any team
he wants. The largest contract in major league history up to this point is Mike Trout, who
signed a 12
year, $426.5 million contract, which pays out $16MM the first year and the remaining
balance is paid
out evenly over the next 11 years.
Ohtani decides to sign with the Dodgers for $700MM over 10 years. Many believe this is an
insane price
given that it is almost double Trout’s deal. High end contracts increase by 10-20%, but not by
75%.
However, the payment terms of Ohtani’s contract is friendly to the team: he will be paid
$2MM/yr for
the 10 years and then the remaining balance is deferred; in the 10 years following the initial
10, he will
be paid the remaining balance at a rate of $68MM/yr.
a.
In terms of present value, how much is each contract worth? 10 pts
a) In terms of present value, how much is each contract worth?
Mike Trout's contract:
Total contract value: $426.5 million
Payment structure given: $16 million year 1, then $36.5 million evenly over 11 years
• Assuming discount rate of 5%
The Present Value (PV) of Trout's contract:
Using formula= PV = FV/(1+r)^n
PV = $16 million + ($36.5 million/ (1+5%)^1)+...+ ($36.5 million/(1+5%)^11)
PV = $319.18 million
Shohei Ohtani's contract:
Total contract value: $700 million
Payment structure: $2 million/vear for 10 years, then $68 million/vear for 10
PV = $16 million + ($36.5 million/(1+5%)^1)+...+ ($36.5 million/(1+5%)^11)
PV $319.18 million
Shohei Ohtani's contract:
Total contract value: $700 million
Payment structure: $2 million/year for 10 years, then $68 million/year for 10 years.
Assuming discount rate of 5%
Present Value (PV) of Ohtani's contract:
Using formula (=PV=FV/(1+r)%n)
PV = ($2 million ((1+5%)\wedge0)+.....+($2) million (/(1+5%)\9)+(568) million
(/(+)5%)^10)+...+ ($68 million/(1+5%)^19)
(PV=) 354.69 million
b.
Is Ohtani’s contract ridiculous? Explain
b) Is Ohtani's contract ridiculous?
Based on the above calculation of both the contracts there is a difference of $35.51 million
only, which means that Ohtani's contract has a raise of 11.12% than Trout's contract which is
pretty normal. ((since) in the question it is mentioned that High end contracts increase by
10-20%). Also considering the status and skills of Ohtani to be better than Trout, the contract
would be considered as a good deal for Dodgers.
1.5 10 pts.
Starbucks is worried about their future. They are debating about what direction to go in:
Proposal 1: Expand the beverage choices to include choices that are rising in popularity,
such as fruity
coffees. People don’t realize that after Brazil, Vietnam is the second largest producer of
coffee.
Proposal 2: Start major ad campaigns and raise the visibility of the brand. Create a Coffee
Day and give
discounts.
The projected financial return is about the same.
Ans:
Using the three pillar approach, analyze the two proposals and make a choice. Which
proposal would
you pick and why?
Pillar 1: Brand Rejuvenation
● Expand Beverages: Moderate impact. Offers trendy options but could dilute brand
identity. (Weight: 0.3)
● Start Ad Campaigns: High impact. Refreshes brand image, raises awareness, and
promotes existing offerings. (Weight: 0.4)
Pillar 2: Customer Engagement
● Expand Beverages: High impact. Attracts new customers with diverse preferences,
creates buzz. (Weight: 0.3)
● Start Ad Campaigns: Moderate impact. Reaches new audiences but primarily
focuses on brand recognition. (Weight: 0.2)
Pillar 3: Financial Performance
● Expand Beverages: Moderate impact. Potential for increased sales from new
offerings, but operational costs and marketing might offset profits. (Weight: 0.3)
● Start Ad Campaigns: Moderate impact. Can boost sales through temporary
promotions and brand loyalty, but long-term financial impact dependent on campaign
effectiveness. (Weight: 0.3)
Weighted Score:
● Expand Beverages: 0.27
● Start Ad Campaigns: 0.34
Based on the analysis, Start Ad Campaigns emerges as the more strategic option for
Starbucks due to its:
● Higher potential for brand rejuvenation: Refreshes the Starbucks image and expands
reach, addressing the core concern of its future.
● Balanced impact on other pillars: Offers moderate boosts to customer engagement
and financial performance.
● Flexibility in campaign focus: Can be tailored to specific goals, like promoting existing
products or attracting new demographics.
However, expanding beverages is not without merit:
● Catering to evolving preferences: Diversifies offerings and attracts new customers
seeking trendy options.
● Potential for long-term growth: New beverages can become core products and drive
sustained revenue.
Ultimately, the decision depends on Starbucks' specific priorities and risk tolerance:
● If immediate brand revitalization and awareness are paramount, Start Ad Campaigns
is the safer bet.
● If long-term product innovation and customer base expansion are crucial, expanding
beverages holds promise, but requires careful planning and execution.