BUSI 3309B

PROJECT MANAGEMENT
WINTER 2024

Assignment 1 SOLUTIONS

Question 1 (15 marks)

You work for a company, which expects to earn at least 8 percent on its projects. The cash flow information
for 4 potential projects is described below.

a) Find the NPV of each project 10 marks).

b) Which of the projects would you fund if the decision is based only on financial information? (1
marks)
c) What other information would you need to make such a decision? Why? (2 marks)
d) Would an organization ever take on a project with negative NPV? If so why? (2 marks)

A. Project ALPHA: This project requires no initial investment at the project initiation, but will cost an
estimated $280,000 in each of the following 5 years. Project revenues will begin in year 4, estimated at
$150,000 in year 4, $350,000 in year 5 and $450,000 in years 6 through 8.

B. Project BETA: Project Beta requires investment of $800,000 at initiation, and then an estimated
$350,000, $250,000, $150,000 and $150,000 in the following 4 years, respectively. Annual revenues will
begin to flow in starting in year 5 at $225,000 and increasing by $25,000 each year up to and including
year 14.

C. Project CAPPA: This project will require an initial investment of $565,000 at the project initiation, plus an
estimated $450,000, $325,000 and $325,000 in each of the following years, respectively. The payout for
this project will be lump sums of $1,070,000 in each of years 4 and 5.

D. Project DELTA: Project Delta is a 15 year project that requires an initial investment of $425,000. Annual
costs in each of the following years of $75,000 will be offset by biannual revenues (every two years
starting in year 3) of $289,000 in each of those years.

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Question 2 (18 marks)

You work for a small retail store. You must decide how many cases of kombucha to order. Twenty
cases fit on a pallet and because of shipping costs, orders must be placed in multiples of 20. You
can either order 20, 40, 60, 80 or 100 cases. Each case costs $15. If you order more than 1 pallet,
you receive a discount of 5% per additional pallet ordered (2 pallets would be 5%, 3 would be 10%,
etc). The cases can be sold for $25 each. Any that are left unsold can be sold to a discount store for
$10. Your records suggest that the probability that you will sell 25 cases is 20%, 45 cases is 45%, 65
cases is 20% and 85 cases is 15%.

a) Construct a payoff table to provide reflect the decisions and outcomes (10 marks).

What would be your decision based on each of the following?

b) Maximin (2 marks)
c) Maximax (2 marks)
d) Minimax regret (2 mark)
e) Expected value (1 mark)
f) Overall – what would you do? Why? (1 mark)

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Question 3 (17 marks)

You must decide whether to buy, build or lease a building for your business needs over the next 10
years. If you decide to build, you must determine if it is better to buy an existing building and
modify it or buy land and build one to match your needs. Leasing an appropriate building will cost
$10,000 per month with an annual increase of 3% per year and will require some retrofitting to suit
your needs ($700,000).

Empty land will cost $2,500,000 and the construction of a new building would be $3,000,000. You
can buy an existing building for $2,500,000 but you will have to modify it to your needs at a cost of
$1,200,000. However, the building itself is quite old and will be at the end of its useful life when
the ten years are up. You estimate that the land alone is worth $2,000,000.

There is a municipal election scheduled in the next months. The frontrunner, who has an estimated
70% chance of winning, is prioritizing core services and the environment. If they win, there is a 65%
chance that they will enact strict regulations that will render your new property worthless (with or
without a building). There is also a chance (20%) that they will pursue more moderate regulations
that will enable you to eventually sell your new property at cost (note: your newly built building will
retain its value but the old building will no longer have any value). If no new regulations are
enacted, your property value will go up by 20% total over the 10 years.

If the leading candidate loses, all of the other candidates are much less likely to change the
regulations at all. If they do make a change (25%), they will enact more business-friendly
regulations that would increase the value of your property by 35% over the 10 years.

a) Draw a decision tree to show the all of the details and outcomes of each of the different
options. (15 marks)
b) Ignoring the cost of capital and any other costs, what should you do? Why? (2 marks)

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Question 4 (10 marks)

Your company has a two-step process for assessing projects. The first gate requires all projects to be
profitable and feasible, given your resources and expertise. The second step is a weighted scoring model,
based on a 10-point scoring rubric. After evaluation of the financial benefit and feasibility, six projects
currently remain under consideration. Each project will be evaluated on the following criteria: ROI (4
points), strategic fit (3 points), resource availability (1 point), innovation (1 point), and ability to manage risk
(2 points).

• The first project has the following scores: ROI=6, strategic fit=7, resource availability=4,
innovation=4 and risk=7.
• The second project has the following scores: ROI=4, strategic fit=8, resource availability=3,
innovation=3 and risk=9.
• The third project has the following scores: ROI=7, strategic fit=8, resource availability=3,
innovation=6 and risk=3.
• The fourth project has the following scores: ROI=9, strategic fit=3, resource availability=4,
innovation=8 and risk=2.
• The fifth project has the following scores: ROI=4 strategic fit=6, resource availability=1, innovation=7
and risk=5.
• The sixth project has the following scores: ROI=8, strategic fit=7, resource availability=3,
innovation=9 and risk=1.

a) Build a decision matrix (5 marks)

b) Which project(s) would you rate highest? (1 marks)
c) Lowest? (1 marks)
d) Which project(s) would you pursue? Why? (1 marks)
e) If you could only choose 1 project, which would it be? Why? (2 marks)

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Question 5 (40 marks)

Given the project activity table below:

Duration
Activity Dependency
(weeks)
A 8
B 4
C 3
D 3 A
E 1 C
F 7 C
G 5 D
H 6 B,D,E
I 6 E,F
J 6 H
K 5 G,I,J

a) Draw a project network from the table above (12 marks)

b)
i. What activity(s) is a burst activity? (1 mark)
ii. What activity(s) is a merge activity? (1 mark)
iii. What is the length of the project? (1 mark)
iv. What is the critical path? (1 mark)
c) Draw the Gantt chart (9 marks)
d) Build the project network using expected activity times based on the new table below (8 marks)
e) What would be the expected length of the project? (1 mark)
f) What would be the project standard deviation? (2 marks)?
g) Using a z-table (one can be found here: https://statisticsbyjim.com/hypothesis-testing/z-table/ ), what
is the probability that the project can be completed in 28 weeks? (4 marks)

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 Duration
Activity Dependency Best Most Worst
Case Likely Case
A 3 8 14
B 1 4 10
C 2 3 12
D A 1 3 9
E C 1 1 6
F C 2 7 14
G D 1 5 8
H B,D,E 3 6 15
I E,F 2 6 10
J H 2 6 12
K G,I,J 2 5 9

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