Tutorial Chapter 1

The directors of Excellent Corporation had been involved in selecting new products
to be introduced in marketplace. There are three opportunities presented to them. One
project was the development of a spreadsheet program that could share files with
spreadsheet programs written for PCs. It will cost RM130, 000 to implement the project. The
sales were estimated to be RM 1,000,000 with an annual growth rate of 10 percent. While
this product did not make use of the Internet, the directors felt that Excellent Corporation had
a moderate chance of obtaining a leadership position in this product category.

The second new product opportunity identified was a Web browser. The initial
investment is RM 97, 500. The sales were estimated to be RM 2,500,000 with an annual
growth rate of 15 percent. Although this application made extensive use of the Internet, the
directors felt that there was a very low probability that Excellent Corporation could obtain a
leadership position in this product category.

The final product opportunity identified was a trip planner program that would work in
conjunction with a PC connected to the Web and download travel instructions to the user’s
handheld computer. This product would require 6250 hours of development time which
equivalent to RM325,000 money to be injected to initiate the project. The sales were
projected to be RM 1,300,000 with an annual growth rate of 5 percent. Like the Web browser
program, the directors felt that there was a low probability that Excellent Corporation could
obtain a leadership position in this category, although the program would make extensive
use of the Internet.

In evaluating the projects, the founders believed it was reasonable to assume each
product had a four year life. They also felt that a discount rate of 15 percent fairly reflected
the company’s cost of capital. Each proposed project sales started at year 2 and cost
incurred at first year around RM 20,000 due to unexpected situation.

i) Determine Net Present Value (NPV) for each project that had been identified by the
product development and marketing directors. Determine which project should be selected.

(10 marks)

ii) Assume the founder’s weight a project’s NPV twice as much as both obtaining/retaining a
leadership position and making use of the web. Use the weighted factor scoring model
method to rank these projects and determine project should Excellent Corporation pursues.

(5 marks)