RITIKA

2K19/BMBA/13
MBA-BA ED(CLASS TEST)

Question-1 Briefly, summarize the key facts of the case and identify the problem being faced
by our two budding entrepreneurs. In other words, what is the decision that they need to
make?
Answer-1Dan and Susan, two budding entrepreneurs, have to decide which two jobs they should
pursue. They are engineers, and they work for a large production company. They have two
projects (or decisions) they have to make after leaving the job they are currently doing. Being in
this company, they started working on a new chip, as a hobby.
The first project was based on a new computer chip that could speed up specific tasks by 25%.
Their initial investment is estimated at about $ 1,000,000. They also estimate cash flows over
the next five years. They can then sell the patent to another chip manufacturing company.
Another option or project they have in mind is to sell the patent quickly, which can give them an
estimated $ 2,000,000 and work on a different project. The idea of ​this project is to test the
silicon fers in zircon content before using fers to form a chip. They will provide a 100% check for
cakes to small chip-producing companies. Dan and Susan estimate the future cash flow for 5
years of this project again.
They should check what project they should do by considering Payback time, discounted return
time, current Net value, internal return rate and profit index and other options.

Question-2 What are some approaches that can be used to solve this problem? What are
some various criteria or metrics that can be used to help make this decision?
Answer-2 There are various methods that can be used to solve this problem -
1. Cost Benefit Analysis - It is a planned project management tool
check the cost compared to the benefits in our project proposals. Differences between
costs and benefits will determine whether action is required or not. Bangu
two main objectives of cost analysis; to determine if the project is sound,
is justifiable and is achieved by determining whether its benefits outweigh the costs, and by
providing
the basis for comparing projects by determining what are the main project benefits
there are costs to it.
2. System Analysis - System analysis is a quantitative method that also provides quantity
systematic assessment of clearly defined problems and alternatives for decision makers.
In simple terms, the process of learning a job, a process, a business in general
in mathematical ways to define its purposes or objectives and findings
performance and processes to achieve it very well.
3. Cost-Profit-Profit Analysis - Also known as split analysis, i.e., point
where the amount of revenue is equal to the total cost (both fixed and variable costs). At this
point i
the company will not make a profit no losses. It is a cost-effective approach
by impacting the various cost levels and volume they have on operating profit.
There are different terms and metrics that can be used to help make this decision -
1. Refund period - Refers to the time when the company will need to be reorganized
to recoup the initial investment you made in starting a business. Length of
the required amount of time for payment in the investment is something that should be used
strictly
think before you start the project - because how long has this been happening
be, for a long time this money is "lost" and if it negatively affects the flow of money until
the project breaks even, even if it starts making a profit.
2. Reimbursement Period - Duration of repayment budget period
the process used to determine the profitability of a project. In other words, it is used
calculate the period during which the initial investment is reviewed. Discount
Payment period is calculated by deducting the amount of the cash flow for each payment
timing and consolidation of the reduced cash flow to the initial value
investment is met.
3. Net Present Value (NPV) - Current Net Value (NPV) is the estimated cost
flow, discounted so far. Used for current or power testing
Investment also allows us to calculate the expected return on investment (ROI) we will receive
find out. We should only include transactions / projects that will have good NPV
and protect those projects with poor NPV.
4. Internal Return Rate (IRR) - It is the rate of return where the current value of
future cash flows are equal to the present value of all expenses associated with
investment. In other words, IRR can be defined as a discount rate, when
used in project financing, displaying the current value of zero value. If the IRR
large or equal to financial costs, a company can accept a project
as a good investment, and the IRR below will not be considered as good with the project
will be rejected.
5. Profitability Index (PI) - Profit Index is a financial instrument that tells us whether
the investment must be accepted or rejected. It uses the concept of monetary value
and is calculated by the following formula. It helps to balance investment and decision making
the best investment to make.
• More than one PI indicates the current value of future revenue from
The investment is more than the initial investment, thus indicating that it will be so
make a profit, which is why the project must be approved.
• Less than one PI indicates the current value of future revenue from
the investment is less than the initial investment, thus indicating a loss from
investment, which is why the project should be rejected.
• One equivalent PI indicates that there is no gain or loss from it
project, so there will be no difference if the project is approved either
rejected.

Question-3 Rank the projects based on each of the following metrics: Payback period,
Discounted payback period, NPV, IRR, Profitability Index.

Answer-3 The metrics calculated in this case are accurate and decisions are made based on
each matrix:
Return period: The return period for Project A is 3.15 years and for Project B is 1.38 years. Both
payment periods for projects are in good standing but Project B will be preferred over Project A
as its payment period is less than Project A.

Discounted recovery period: Project A rebate recovery period is 3.98 years and that Project B
period is 1.79 years. Both are sleeping in the expected area but Project B will be preferred to
Project A as its discounted payment period is less than that of Project A.

NPV: NPV's total revenue for the five years of Project A is $ 612,847 and that of Project B is
596,206. As we see that the NPV for Project A is higher than Project B. Therefore, project A will
be replaced by Project B.

Internal Return Rate: The internal return rate for Project A is 35.93% and for Project B. The
higher the IRR in the project, and the higher the cost of capital expenditure, the higher the
revenue to the Company. Both projects have an IRR greater than 20% (Hurdle Rate). Since
Project B has a higher IRR compared to Project A, Project B will be ranked higher than Project A.

Benefit Indicator: Project A has a profit index of 1.61 and Project B has a profit index of 1.66.
Project B will be ranked higher than Project A as the Project B PI is higher than Project A.

Question-4 Which of these projects would you recommend? Explain why.

Answer-4 By looking at the standards given for both projects in the previous question, we

I found that project A was a preferred project in terms of one metric, namely, NPV, and the
project

B was a preferred project as four metrics, i.e., return time, discount return time,

IRR and PI. In terms of this result, I highly recommend Dan and Susan to seek out

Project B as this is a very rewarding activity for both.