Reference no: EM13380394

Project Proposal

After reviewing the annual report of Ford Motor Company, a proposal is developed to advise the organization on obtaining funding and managing a project budget to purchase equipment to increase worker safety. The initial investment is $25M and the yearly cash inflows are $5M for the second year, $10M for the third, $15M for the fourth, and $12M for the fifth year. The cash flows are at the beginning of the period and at a discount rate of 10%. Business needs are defined, including high-level deliverables to solve problems. The Net Present Value (NPV), internal rate of return (IRR), profitability index, and payback methodologies are calculated to determine the projects viability. Strengths and weaknesses are determined of each methodology. After determining these calculations, the project is accepted or rejected, and the rationale is explained for the decision.

Business Needs and Deliverables

Ford Motor Company has discovered that the company to increase worker safety. To accomplish this Ford has decided to purchase some equipment. Many issues surround safety such as insurance premiums, legal issues, morale, and health. The initial cost to improve safety will pay off in the end by saving money and improving quality in the areas mentioned. Deliverables to solve problems throughout this project include defining the problem and scope of the project, measuring the current process of performance, analyze the current performance and isolate the problem, selecting the appropriate equipment, and control to ensure the target is met with the new equipment. 

NPV, IRR, Profitability Index, Payback Methodology:

Strengths and Weaknesses

This projects viability must be determined and the strengths and weaknesses of each methodology. To do this the NPV, IRR, profitability index, and payback methodology must be calculated. Defining these terms is vital to get a clear picture. "Net present value is the comparison of the present value of the payoffs less the present value of the costs of the project. If the present values of the payoffs exceed the present value of the costs, then it is a project that creates value" (Callahan, Stetz, & Brooks, 2007, p. 131). The strength of NPV is that it measures the total profit, and this contrasts the project clearly. The weakness is that the minimum rate of return changes results radically. Next defining IRR is beneficial. "The internal rate of return is equal to the discount rate at which the investment's NPV equals zero" (Callahan, Stetz, & Brooks, 2007, p. 133). This calculation is compared to the company's required rate of return to help determine the viability of a project. The strength of IRR is the ease of which one can compare annual interest rate to costs of capital investment rates. The weakness of IRR is manually calculating is difficult and results can be misleading.  Profitability index compares costs and benefits of project. The strength of the profitability index is that it discloses the up front initial commitment to be made to complete the project. A weakness is that it is not in a measurement easily understood. The payback methodology identifies the amount of time it will take to recuperate the initial investment. A payback is uncomplicated to calculate, but it overlooks long-term payoffs.

Calculations and Acceptance or Rejection of the Project

The calculations to determine the projects viability are as follows: The NPV=$6.61M. The IRR=21.05%. Profitability index= .26. The payback is doubled by year four and by year five payback reaches $42 million. From the results of these calculations, the project is feasible. The project is viable because it surpasses the discount rate of 10% and the return on investment is doubled by year four. What is even more exciting is the project has a return on payback of $42M in the fifth year. This project is viable and is accepted.

Conclusion

Ford Motor Company is considering purchasing equipment to improve the safety of the company. Before this project is accepted, the business needs and deliverables are defined. Next NPV, IRR, profitability index, and payback methodology are defined along with strengths and weaknesses. Last, these calculations are performed and the viability of the project is decided. Based on the findings this project is viable and is accepted.