Question

The Business School is examining the viability of setting up a new one year postgraduate degree in International Finance, starting one year from now. The degree will run in conjunction with the existing programmes, as well as offering two new courses aimed at this specific new program. The

university will only run the new programme if it turns out to be a positive net present value. Following a period of consultation, the Business School produces a report on the viability of the project which contains the following information:

1. The university will be required to purchase a software package for one of the new finance courses, which simulates the conditions of international exchange rate movements. This software costs Ghc100,000 today, and the university estimates that it can be sold for Ghc30,000 at the end of year 5.

2. The Business School has spent c/20,000 to date on researching the viability of the project. No further research costs are necessary.

3. Teaching will take place in a part of the university that is normally rented out to the local council for adult education classes at a cost of c/5,000 per annum. This revenue would be lost as a result of the project.

4. The university expects to charge c/10,000 per student per annum for the degree. Fees are paid at the beginning of each year. Additional student numbers are forecast to be 10, 10, 20, 30, and 20 through years 1 to 5 respectively, in addition to those on existing programmes.

5. Additional variable costs (photocopying, miscellaneous, paperwork, etc.) have been forecast at c/7,000 per student per annum.

6. The university will employ an additional secretary to deal with the demand from students at a cost of c/15,000 per annum, who will leave after 5 years.

7. The sta¤ budget for the current postgraduate finance courses is c/400,000, which is allocated across the three existing programmes. The new program will incur a charge of c/100,000 per annum for staff expenditure if a new staff is employed. Existing staff will be expected to teach more hours and no new staff will be appointed to the project. Sta¤ costs will now be split across each of the four postgraduate programmes.

8. Capital allowances on the software are 25% per annum on a reducing balance basis.

9. Assume that the university pays taxes on profits at a rate of 30%, payable one year in arrears and the tax loss on this project can be used to shield the income from other projects.

The university uses a rate of return of 10% to evaluate projects of this nature.

Main question: should the university launch the new project?

Your tasks:

a. prepare the cash .ow analysis in the form of table with all the relevant cash flows

b. calculate the NPV and profitability index of the project

c. find the IRR for this project

d. find the payback period and discounted payback period for this project.

e. conduct the scenario analysis and sensitivity analysis for this project