PM.346.HSF1 The Practice of Project Management Answer NPV below Background Joseph-McHendry Purveyors, Ltd. (JMP) is an international retailer of fine collectibles and bibelots, including authentic antiques, objets d'art (paintings, sculptures, etc.) and expensive jewelry. It operates on a world-wide basis, with over twenty outlets in various developed countries, and is headquartered in San Francisco. JMP has an excellent reputation, and is known in the industry for its quality, honesty and providing "the personal touch." Much like Nordstrom, JMP charges a premium for the products; but their clientele believe that they are getting their money's worth! Revenues for this past year exceeded $800 M. The firm's organization is essentially functional, with a product orientation. Major departments include Marketing, Finance and Accounting, Human Resources, Information Technology, Purchasing, Collectibles and Jewelry. One of the founders, Cyril Joseph, died several years ago, and the other, Claude McHendry, recently suffered a major stroke and has stepped down as CEO, retiring completely. In an attempt to infuse some contemporary thinking and energy into the company, the Board of Directors has brought in Erica Kelly, an executive from a related industry, who has a reputation for being innovative, as the new CEO. Erica firmly believes that business technology has improved to the point that the firm can make the jump to e-marketing without sacrificing the estimable JMP culture and reputation for quality. With the backing of the Board, she has won approval for that strategy and is now faced with defining and organizing the business dynamics associated with implementing it. You have joined the firm with the ultimate intent by all concerned of becoming the Deputy Head of the Marketing Department, who will be retiring within a year, but in the interim you have been selected by Erica to be the project manager for the PROJECT OF PLANNING AND IMPLEMENTING AN E-MARKETING SYSTEM. In reviewing the very preliminary concepts, you have determined that, since countless similar projects have been done previously, the steps/requirements are well-known, and the risks low, a predictive methodology is most appropriate to be used in the project. You have had some previous experience in e-marketing, and prior to joining JMP you have reviewed in your mind some of the concepts and terms involved in e-business applications. (Some of these are included in the link: E-business Notes) The critical first step in the overall project is the creation of the JMP Project Management Plan and that is your mission at this point. Part 1: Initiating/Planning Processes Based on your previous experience and on the review that you made of the concepts and tools of e-business, you have a pretty good idea about what is needed and what the end results should look like. But this is your first real "project" of this scale, and you want to bend every effort to ensure that you manage it correctly. The CEO, Ms. Kelly, has decided to name the head of marketing, Gage Boiman, as the project sponsor. In discussions with him, it has been decided that you will have nine part time members of your project team: three from Marketing, three from Information Technology and three from Supply Chain/Logistics divisions respectively. TO DO: Net Present Value. The project must compete with other projects in the JMP's portfolio for authorization and funding. One calculation that is used in such evaluation is the metric: Net Present Value (NPV). Assume that business analysis shows this project will require an initial investment of $1.5 Million at the beginning of the 1st year, and will provide expansion and efficiencies giving a net cash inflow averaging $425,000 per year for five years. (For consistency all JMP's projects are evaluated over a five year life.) The required rate of return (hurdle rate) is 12%. (a) What is the Net Present Value? SHOW THE ACTUAL CALCULATIONS (b) In what year does the NPV turn positive? (c) Comment on just what the number you have found (the NPV) means in terms of the profitability of the project.