TUMAINI UNIVERSITY IRINGA UNIVERSITY COLLEGE FACULTY OF BUSINESS AND ECONOMICS

Course:

PROJECT PLANNING

Lecturer:

Mr. ILDFOS CHONYA

Submission Date:

4TH JANUARY 2011

Nature of Assignment:

INDIVIDUAL ASSIGNMENT

Students Name:

MOHAMED MLAWA

Working 20x0.03=0.6 0.6+20=20.6

20.6x0.03=0.618 0.618+20.6=21.22

21.22x0.03=0.6366 0.6366+21.22=21.85

21.85x0.03=0.6555 0.6555+21.85=22.51

Working 8x0.04=0.32 0.32+8=8.32

8.32X0.04=0.3328 0.3328+8.32=8.65

8.65x0.04=0.346 0.346+8.65=9.00

9.00x0.04=0.36 0.36+9.00=9.36

<2a> Capital Investment decision making process has the following key stages. i. ii. iii. iv. v. vi. Identifying investment Opportunities Screening investment proposals Analyzing and evaluating investment proposal Approving investment proposals Implementing Monitoring and reviewing investment

Identifying investment Opportunities Investment opportunity could originate from analysis of strategic choices, analysis of the business environment, research development, or legal requirements. The key requirement is that investment proposals should support the achievement of organizational objectives.

Screening investment proposals Companies need to choose between competing investment proposals and select those with the best strategic fit and the most appropriate use economic resources since in the real world capital markets are imperfect, so its usual for companies to be restricted in the amount of finance available for capital investment.

Analyzing and evaluating investment proposal s

Calculation of NPV Year Investment Income Operating cost Net Cash Flows Discount at 10% Present Values Net Present Value 0 (2,000,000) 1 1,236,000 676,000 560,000 0.909 509,040 2 1,485,400 789,372 696,028 0.826 574,919 3 2,622,000 1,271,227 1,350,773 0.751 1,014,430 4 1,012,950 620,076 392,874 0.683 268,333

(2,000,000) 1.000 (2,000,000) 366,722

Calculation of operating Cost Year Inflated Variable Cost Demand Variable Costs Inflated Fixed Cost Operating Cost 1 8.32 60,000 499,000 176,800 676,000 2 8.65 70,000 605,500 183,872 789,372 3 9.00 120,000 1,080,000 191,227 1,271,227 4 9.36 45,000 421,000 198,876 620,076

Calculation of internal rate of return Year Net Cash flow Discount Present Values Net present value 0 (2,000,000) 1.000 (2,000,000) (79,014) 1 560,000 0.833 466,480 2 696,02782,0988 0.694 483,043 3 1,350,773 0.579 782,098 4 392,874 0.482 189,365

Internal rate of Return=10+ [(20-10) x366.722]/ [366,722 +79,014] 10+8.2=18.2%

(iii) Calculation of return on capital employed

Total cash inflows=560,000+696,028+1,350,773+392,874=2,999,675 Total depreciation=initial investment (i.e. no scrap value) Total Accounting Profit= 2,999,675-2,000,000=999,675 Avarage Annual Accounting Profit= 999,675/4=249,919 Avarage Investment= 2,000,000/2= 1,000,000 Return on Capital Employed= 100x249,919/1,000,000= 25%

(iv)Calculation on Discounted payback

Year PV of cash flows Cumulative PV

0 (2,000,000) (2,000,000)

1 509,040 (1,490,960)

2 574,919 (916,041)

3 1,014,430 98,389

4 268,333 366,722

Discounted payback period= 2+ (916,041/1,014,430)=2+0.9=2.9 years

<C> The MPV being positive that is 366,722 this implies that the investment proposal is financial accepted. The method of IRR also justify that the investment proposal is should be accepted as IRR of 18.2% >10% return required by PV co. If the advice offered by the IRR method differed from that offered by the NPV method, the advice offered by the NPV method would be preferred