a) One of the reasons for a Project Business Case document is the financial justification for...

  

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a) One of the reasons for a Project Business Case document is the financial justification for the project. Many techniques exist for carrying out this exercise, both traditional and scientific. In carrying out such justification, Elixir Limited, an estate management company has settled on the net present value (NPV) technique for the financial justification of all its projects, including a recent IT project involving the setting up of a website at its head office in Lusaka. The company has received four quotations indicating the expected capital outlay and the subsequent cash inflows over the next five years. Each quotation is thus treated as a separate project. The following details relate to the four quotations: Quoted Price Year 0 1 2 Year 3 4 5 6 8 10 3 4 5 Quote 1 K100,000 K10,000 K10,000 K10,000 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 K20,000 K100,000 The company has a cost of capital equivalent to 10%. The following rates are normally. consulted for the relevant discount factor when making NPV decisions; Interest Rate/ 1 2 3 Quote 3 Quote 2 K1,000,000 K100,000 K200,000 K30,000 K200,000 K30,000 K200,000 K30,000 K200,000 K30,000 K300,000 K30,000 0.9426 0.9246 0.9071 0.89 0.8573 0.8264 0.9151 0.889 0.8638 0.8396 0.7938 0.7513 Quote 4 K160,000 K40,000 K40,000 K40,000 K40,000 K90.000 0.8885 0.8548 0.8227 0.7921 0.7351 0.683 5 0.8626 0.8219 0.7835 0.7473 0.6806 0.6209 Using the net present value technique (NPV), decide with reasons which quotation should be acceptable to Elixir Limited. (10 Marks) b) If the concern for the company was early recovery of its investment, which quotation would be most appropriate and why? (5 Marks) c) Assuming a return on investment (Rol) approach was adopted by Elixir Limited, decide which quotation would be found to be the most suitable. (10 Marks) a) One of the reasons for a Project Business Case document is the financial justification for the project. Many techniques exist for carrying out this exercise, both traditional and scientific. In carrying out such justification, Elixir Limited, an estate management company has settled on the net present value (NPV) technique for the financial justification of all its projects, including a recent IT project involving the setting up of a website at its head office in Lusaka. The company has received four quotations indicating the expected capital outlay and the subsequent cash inflows over the next five years. Each quotation is thus treated as a separate project. The following details relate to the four quotations: Quoted Price Year 0 1 2 Year 3 4 5 6 8 10 3 4 5 Quote 1 K100,000 K10,000 K10,000 K10,000 0.9709 0.9615 0.9524 0.9434 0.9259 0.9091 K20,000 K100,000 The company has a cost of capital equivalent to 10%. The following rates are normally. consulted for the relevant discount factor when making NPV decisions; Interest Rate/ 1 2 3 Quote 3 Quote 2 K1,000,000 K100,000 K200,000 K30,000 K200,000 K30,000 K200,000 K30,000 K200,000 K30,000 K300,000 K30,000 0.9426 0.9246 0.9071 0.89 0.8573 0.8264 0.9151 0.889 0.8638 0.8396 0.7938 0.7513 Quote 4 K160,000 K40,000 K40,000 K40,000 K40,000 K90.000 0.8885 0.8548 0.8227 0.7921 0.7351 0.683 5 0.8626 0.8219 0.7835 0.7473 0.6806 0.6209 Using the net present value technique (NPV), decide with reasons which quotation should be acceptable to Elixir Limited. (10 Marks) b) If the concern for the company was early recovery of its investment, which quotation would be most appropriate and why? (5 Marks) c) Assuming a return on investment (Rol) approach was adopted by Elixir Limited, decide which quotation would be found to be the most suitable. (10 Marks)

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A The net present value NP V technique is used to help determine which project is the most profitable and should be accepted by Elixir Limited NP V takes into account the discount rate and the expecte... View the full answer