Question

Your management team has brought to you the result of their projections of two business plans as follows. The internal policy is to have at least 5.75% of ROI of any new or existing businesses.   Both projects require the same amount of investment of $1,200,000. Everyone is waiting for your decision to select one. Which project would you recommend them to go for?

Project A:            This project has three scenarios as follows:

1.   In an optimistic case, it will bring in the net profit of $120,000; the probability of this happening is 15%.

2.   In a moderate case, it will bring in the net profit of $ 60,000; the probability of this happening is 75%.

3.   A pessimistic case that will bring in net profit of $ 20,000; the probability of this happening is 10%.

Project B:             This project has three scenarios as follows:

1.   In an optimistic case, it will bring in the net profit of $120,000; the probability of this happening is 25%

2.   In a moderate case, it will bring in the net profit of $ 80,000; the probability of this happening is 60%.

3.   In a pessimistic case, it will bring in the net loss of -$ 40,000; the probability of this happening is 15%.

Group of the choice

a. Project A

b. Project B

c. Both are recommendable.

d. Neither one is recommendable.

Answer 1

Answer) b - Project B

Workings

Project A

Scenario	Net profit	Probability	Expected Net Profit
Optimistic	$1,20,000	0.15	$ 18,000
Moderate	$   60,000	0.75	$ 45,000
Pessimistic	$   20,000	0.1	$ 2,000
			$ 65,000

ROI =( Net Profit / Investment ) * 100

=( $65,000 / $1,200,000 ) *100

= 5.42%

Since it is less than minimum ROI of 5.75%, this projet will not be selected.

Project B

Scenario	Net profit	Probability	Expected Net Profit
Optimistic	$1,20,000	0.25	$ 30,000
Moderate	$   80,000	0.6	$ 48,000
Pessimistic	$ (40,000)	0.15	$ (6,000)
			$ 72,000

ROI =( Net Profit / Investment ) * 100

=( $72,000 / $1,200,000 ) *100

= 6%

Since it is more than minimum ROI of 5.75%, this projet will be selected.