Let's assume that SAP Corporation, a leader in the business

applications software industry, is interested in developing a new

application package for inventory management and shipping
control. It is trying to decide which project to select from a set of
three potential alternatives.

Alternative 1
Year 0 1 2 3 4 5 6 7 8
Benefits 0 70000 75000 70000 75000 80000 85000 90000 95000
Costs 300000 5000 5000 5500 5500 7000 7000 7000 8000

Alternative 2
Year 0 1 2 3 4 5 6 7 8
Benefits 0 50000 60000 70000 80000 85000 90000 95000 100000
Costs 260000 5000 5500 6000 6500 7000 7500 8000 8500

Alternative 3
Year 0 1 2 3 4 5 6 7 8
Benefits 0 55000 60000 75000 80000 85000 90000 95000 100000
Costs 270000 5000 5500 6000 6500 7000 7500 8000 9000

Based on past commercial experiences, the company feels that the

most important selection criteria for its choice are: net present
value, payback period, return on investment, and internal rate
of return. Each criterion is ranked according to its relative
importance. Our choice of projects will thus reflect our desire to
maximize the impact of certain criteria on our decision. We assign
a specific weight to each of our four criteria:
 Criterion Weight
Net present value 35%
Payback period 35%
Return on investment 10%
Internal rate of return 20%

In addition to developing the decision criteria, we create

evaluative descriptors that reflect how well the project
alternatives correspond to our key selection criteria. We evaluate
each criterion (which is scored high, medium, or low) according to
the following Table:

Score
Criterion
low medium high
Net present value 1 2 3

Payback period 3 2 1

Return on investment 1 2 3

Internal rate of return 1 2 3

1. For each alternative, calculate the net present value, the

payback period, the return on investment, and the internal rate of
return using a discount rate of 12 percent.
2. Which project alternative is the best? Why?