PMGT-510 Assignment 2: Financial Project Selection for Queensland Corp

This report analyzes Queensland Corp's project selection process, focusing on the application of Net Present Value (NPV) at the Weighted Average Cost of Capital (WACC) of 10.5%. It compares WACC and Minimum Rate of Return (ROR), emphasizing WACC's comprehensive approach. The report recommends projects for funding based on financial analysis, IRR, and a weighted scoring model, considering a budget constraint of $8 million. Projects such as Bundaberg Rum Acquisition, Market Expansion West, and Market Expansion South are prioritized. The report also discusses the importance of factors such as new product development, cost analysis, market trends, and government regulations in the project selection matrix. Furthermore, it highlights the differences between financial analysis models and weighted scoring models in project ranking, emphasizing the former's focus on financial security and the latter's consideration of non-financial priorities. The analysis concludes by identifying the top projects for both models.

PMGT – 510
Assignment : 2

The NPV at the WACC (Weighted-Average Cost of Capital) of 10.5% can be used.
WACC is the actual cost of capital for Queensland Corp. It takes all form of capitals into consideration,
including debt, equity, or preferred capital, and represents the minimum return that a company must earn
on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest
elsewhere. On the other hand, minimum Rate of Return (ROR) only indicates the minimum return can be
earned by the corporation.
WACC is more comprehensive than RoR, which doesn’t take cost of capital into consideration.
Importantly, WACC is dictated by the external market and not by management. With limited budget,
Queensland Food Corp should consider cost in an objective way. Therefore, NPV at WACC should be
used.

As stated in the case study, Water treatment project is considered as an environmental category. In most
cases, environmental projects that involve the government (in this case the Australian Gov.) would
require a longer time in terms of return on investment. From a basic Financial Analysis, the cost of
Wastewater project today is only $400,00 with a potential increase up to $1 million in 4 years. Given this
minimum amount of initial cost and opportunity to have a big impact on the environmental benefits by
getting rid of the pesticides and chemicals, company can make this project as a potential investment to
pursue. In addition to this approach, we can evaluate with other measures such as 1) the efficiency rate
that the company would gain by the amount saved each year or 2) Environmental Score Index model that
focuses on the importance value and benefit of the environmental project as I stated above.
Projects that would be funded: Project 11, 7 and 8 - (Bundaberg Rum Acquisition, Market Expansion and
Market Expansion South). First, Bundaberg Rum Acquisition would bring a high expected return, and
offers an opportunity for an expansion in a unique market. Market Expansion West and South – West

having an increasing high purchasing power and South having an increased demand within a large
population would make these two as a potential investment. All three projects have high IRR compared
to NVP at Corp WAAC (10.5%). Given the fact that the board of directors are willing to spend max of $8
million; Project 11,7 and 8 would add up to total of $8 million in initial cost and would make an ideal
investment plan ($4m, $2m and $2m respectively).
Projects that would not be funded are 4, 10, 2, 9, 3, 5, 1 and 6.
 New product: New products could bring extra attention from the market, which could potentially
increase the final sales and future market expansion.
 Cost: Directly effects the weighted score model analysis, a significant criterion which people usually
consider first.
 Physical Environment: climate changes and natural disasters could change the process of the project
and also the demand of the market.
 Resource Planning: For new product development, people are new to this, it may need extra
resources
on some of the projects. And for some other projects, they may need less resources. So, reasonable
resource planning is critical.
 Congeneric product: before people make the decision of choosing projects, people should think
about
if they have any other congeneric product in the market or in projection. If they do
have, thinking whether this product will effect their old product’s market share. Start a projection of a
congeneric or similar product may generate more risks.
 Success probability: The possibility of a successful project development.
 Payback period: the length of time the project would take to pay back or recover the initial
investment

cost. Shorter pay-back periods are more considerable.
 Government Regulations: Make sure there will be no conflicts between the project development and
government rules. Project should comply the existing rules and also be caution of the upcoming
potential government regulations.
 Continuity: A good continuity of the project should include great strategy planning and subsequent
repair and maintenance. A good continuity could increase the life of the whole production and
projection.
 Market trend : With the fast development of today’s technology, company need to follow up with
the
trend of the market, in order to provide the good product and related services.
 Acceptable IRR: An acceptable Internal rate of return means the potential investment is profitable.
The higher IRR will generate higher future cash flow.
 New product: As the corporation would like to have more net profit, new products have higher
chance
to boost the market demand, so it is a mandatory criterion.
 Cost: In this case this corporation have a spending limit, and the cost of each project is fixed.
Therefore,
it is mandatory.
 Payback period: The company set up a policy for project approval, it brings out the minimum
acceptable IRR and Maximum Acceptable Payback years. Hence, it is mandatory.
 Success Probability: IRR, potential profit, future development could all effect the success
probability.
With this comprehensive term, the high probability means the better chance of success. So, it is
mandatory.
 Market trend: The product with good quality and value are not enough, it needs to be acceptable in
today’s market demand.
 Acceptable IRR: The internal rate of return (IRR) rule is a criterion to evaluate whether a project or
investment is worth for pursuing.

Based on the mandatory criteria that we’ve identified in 2a,ii, we created a selection matrix as below. We
assigned weight to each criteria based on the company’s board priorities as described in the case. For
example, since most members of management wanted to expand the company’s market presence and
introduce more new products to boost sales, we have assigned the highest weight to New Product and
New Market. Also, as Queensland Food Corp sales had been static since 2000, we think the payback
period and acceptable IRR are also very important to the firm. When evaluating payback period and IRR,
we took into consideration the respective Max Payback Accepted and Min Accepted ROR for each
project. Because the firm established the sliding scale that adjusted the project’s return expectation to its
risk. We then evaluated the project’s Cost compared among the other projects, and the Success
Probability was based on the operational risk of each project.

After summing up the total score for each project, we ranked them accordingly. Given the limited budget
of $8m, we have screened 3 projects to be considered for the next round – Project 9 (Snack Food
Development/Introduction), 11 (Bundaberg Rum Acquisition), and 7 (Market Expansion West
(Western Territory). These projects’ aggregated cost would be $7.8m.
The accurate method of ranking the project is by selecting the specific criterion and the rate of the
project. Having a score of 1 implies that the project carries a minimal or negative impact based on the
selected criterion. On the other hand, having a score of 5 implies that the project has excellent impact.
The project was evaluated using AHP criteria where the rating was multiplied by the weight and then
assigned to laid down criterion and depicted as the weighted score.
After the project has been rated, the answer should be multiplied by the weight and assigned to the
criterion as weighted score. The sum of the project is added at the far end of the table. The highest
scoring project is selected.

Here is the list of remaining projects according to the group analysis:
Part 3: Difference between the models.
Yes, there is prominent difference in the way how projects are ranked in both the models.
Both methods of analysis are different as the ranking in financial model is done with reference to the
generation of the profit and the cost invested in the project. So, the IRR is compared to the cost of the
project in this model. Whereas, in the Weighted scoring model, the projects are selected on the non-
financial factors. This means that non-financials factors are sensitive because the scoring model will
change if these factors will change.

Top 5 priority projects for both models are:
Thus, we can figure out from the above analysis that the main aim of financial analysis model is to help
the organization with the security of assets whereas the weighted scoring model helps the organization
with the non-financial priority.