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The Pan Europa Foods SA Case study questions ie assignment 1
Q3.How is investment riskness and size corrected?
Also help me with questions 5 to 7
HELP MASTER OF PROJECT MANAGEMENT
MPM502 PROJECT COST ANALYSIS AND APPRAISAL
[21 Mar ? 2 May 2016]
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MPM502 PROJECT COST ANALYSIS AND APPRAISAL
2 May 2016
30% of total marks for the subject
Mr. Derek Poon
Question 1 (50 marks)
Read the Case of Pan-Europa Foods S.A. (page 69, ?Project Management: A Managerial
Approach?, 9th Ed by Meredith, Mantel and Shafer).
In addition to the write up on the case, the following updated information is now available to
the members of the management committee:
Replacement and expansion of the truck fleet. After the preliminary study, there was
a revaluation of the savings and added sales potential of the project and the revised
figures are now given in the table. Basically, the usable life of the truck would extend
well beyond the 7 years envisaged initially.
Expansion of a plant. Fabienne Morin in discussion with Heinz Klink and Maarten
Leyden informed that Maartens initial projection of the benefits of the plant expansion
is too conservative. The additional capacity could be used for the higher margin
products resulting in much better results. This is now updated in the table, indicating a
shorter payback period and higher IRR.
Plant Automation and Conveyor System. Maarten Leyden informed that the company?s
labour union have now raised the matter of safety in the 6 older plants. After noticing
that the last 2 plants that the company built had the conveyors which eliminated heavy
lifting by employees, they are now demanding that the company also install the
conveyors in the 6 older plants. If the company do not respond positively, there is a risk
of the employees going on strike at the 6 older plants. The impact of such a strike would
be a loss of Euro 1.0 million each time, not to mention the loss of reputation for the
company. They argue that the company can easily recover the cost of the conveyor
systems from the improved productivity of the system. Maarten also informed that that
union would accept the company upgrading 3 of the 6 old plants first at half the cost.
The revised savings figures also have a longer lasting effect. The effect of these changes
is shown in the revised table.
Market Expansion Southward. There was a revision on the growth rate of the market
in the south. After the initial market penetration and development, it was envisage that
the market would grow much slower than initially projected due to the demographics
of the people there. The revised figures are shown in the table.
Free Cash Flows and Analysis of Proposed Projects4 (all values in Euro millions)
Maximum Payback Accepted
Minimum Accepted ROR
NPV at Corp WACC (10.6%)
NPV at Minimum ROR
Equivalent Annuity (note 2)
Expected Free Cash Flows (note 4)
The effluent treatment program is not included in this exhibit
The equivalent annuity of a project is that level of annual payment over 10 years that yield a net present value equal to the NPV at the minimum required rate of return for that project. Annuity
corrects for differences in duration among various projects. In ranking projects on the basis of equivalent annuity, bigger annuities create more investor wealth than smaller annuities
This reflects Euro 11 million spent both initially and at the end of year 1
Free cash flow = incremental profit or cost savings after taxes + depreciation - investment in fixed assets and working capital
Franchisees would gradually take over the burden of carrying receivables and inventory
Euro 15 million would be spent in the first year, 20 million in the second and 5 million in the third
Based on the changes, write a short proposal (not more than 2000 words) to seek approval
from the Board of Directors explaining which projects are selected and the reason for the
selection. The proposal should include any tables which clearly show the criteria applied, the
scoring (if any) and the results. The proposal should comply with the requirement of the Board
of Directors to limit the Project Commitment for the year to ?80 million. In this part, students
would be judge on Content (35 marks) and Style & Presentation (15 marks) as follows:
Content (35 pts)
Relevance to Questions Asked
Effective Use of Theory
Topics Discussed in depth
Logically Developed Arguments
Variety of viewpoint analysed
Originality and creative thought
Goes Beyond Basic Course Material
Style & Presentation (15 pts)
Framework and Diagrams
Question 2 (50 marks)
SmarTone currently owns a radio spectrum in the 1800 MHz bandwidth. SmarTone is a
telecommunications company in Malaysia that provides voice, multimedia, and broadband
services in the mobile and fixed-line markets through its ubiquitous GSM/3G/HSPA+ networks.
As of June 30, 2015, SmarTone was serving a total of 1,164,000 customers in Malaysia.
SmarTone is growing rapidly; and consistent with its growth, it has a relatively large capital
budget. While most of the company?s projects are fairly easy to evaluate, a handful of projects
involve more complex evaluations.
In January 2015, SmarTone considered bidding for another 1800 MHz spectrum. Aubrey Wang,
senior member of the company?s finance staff, coordinates the evaluation of these more
complex projects. Her group provides their recommendations directly to the company?s CFO
and CEO, Ann Qui and Faizal Malek, respectively.
Considering real options, one of Aubrey?s colleagues, Tom Peters, has suggested that instead
of acquiring another 1800 MHz spectrum today, it might make sense to wait a year because
the technology would be more mature and the demand for the spectrum would be clearer.
SmarTone would then be better able to forecast the project?s cash flows. Currently, SmarTone
forecast that the additional 1800 MHz spectrum will generate expected annual net cash flows
of $33,500 for 4 years. However, if the company waits a year, it will learn more about the
market conditions. There is a 60% chance that the market will be strong and a 40% chance that
it will be weak. If the market is strong, the annual cash flows will be $43,500. If the market is
weak, the annual cash flows will be only $21,500. If SmarTone chooses to wait a year, the initial
investment will remain $100,000 and cash flows will continue for 4 years after the initial
investment is made. Assume that all cash flows are discounted at 10%.
What is real options analysis? What are the real options that a project can have?
Should SmarTone bid for another 1800 MHx spectrum today, of should it wait a year
before deciding whether to bid? (5 marks)
Now assume that there is more uncertainty about the future cash flows. More
specifically, assume that the annual cash flows are $53,000 if the market is strong and
$13,500 if the market is weak. Assume that the up-front cost is still $100,000 and that
the WACC is still 10%. Will this increase uncertainty make the firm more or less willing
to invest in the project today? (3 marks)
SmarTone is considering another radio spectrum, 2600 MHz. The 2600 MHz spectrum has an
up-front cost of $200,000 and an economic life of 3 years. If the company bids for the spectrum,
its after-tax operating cost will be $100,000 a year; however, the project is expected to produce
after-tax cash inflows of $180,000 a year. Thus the project?s estimated cash flows are as
Cash Outflows ($)
Cash Inflows ($)
Net Cash Flows ($)
If the project has an estimated WACC of 10%, what is the project NPV? Should the
company proceed with the project? (3 marks)
While the project?s operating costs are fairly certain at $100,000 per year, the estimated cash
inflows depend critically on whether most of the SmarTone?s customers accept the
implementation of the 4G LTE (Long Term Evolution) service on the 2600 MHz spectrum.
Aubrey estimates that there is a 60% chance that the customers will use the service, in which
case the project will produce the after-tax cash inflows of $250,000. Thus, its net cash flows
would be $150,000 per year. However, there is a 40% chance that the customers will not use
the service, in which case the project will produce after-tax cash inflows of only $75,000. Thus
its net cash flows will be -$25,000.
Work out the estimated cash flows and calculate the project?s NPV under each of the 2
scenarios. What is the Expected NPV of the project? (5 marks)
While SmarTone does not have the option to delay the project, it will know one year from now
whether customers prefer the new service. If customers choose not to use the service,
SmarTone has the option to abandon the spectrum. If SmarTone abandons the project, it will
not receive any cash flows after year 1 and it will not incur any operating costs after year 1.
Thus if the company chooses to abandon the project, its estimated cash flows is as follows:
Customer do not accept
Should SmarTone invest in the 2600 MHz spectrum today, realizing it has the option to
abandon the project at the end of Year 1? (5 marks)
Finally, SmarTone is also considering another 900 MHz spectrum. This new spectrum has an
up-front cost of $500,000, and it is expected to produce after-tax cash inflows of $100,000 at
the end of each of the next 5 years (t=1,2,3,4,5). Because the 900 MHz spectrum has WACC of
12%, it clearly has a negative NPV. However, Aubrey and her group recognize that if SmarTone
goes ahead with another 900 MHz spectrum today, there is a 10% chance that this will lead to
subsequent opportunities that have a net present value at t=5 equal to $3,000,000. At the same
time, there is a 90% chance that the subsequent opportunities will have a negative net present
value (-$1,000,000) at t=5. On the basis of their knowledge of real options, Aubrey and her
group understands that the company will choose to develop these subsequent opportunities
only if they appear profitable at t=5.
Given these information, should SmarTone invest in another 900 MHz spectrum
today? (5 marks)
Having worked out and analyzed the issues up to this point, write a proposal (not more
than 1000 words) on behalf of Aubrey to the CFO and CEO of SmarTone recommending
the actions to take on the 1800 MHz, 2600 MHz and 900 MHz spectrum based on the
results of your Real Options Analysis. The proposal should show all the workings in a
clear format to support the recommendations and a clear Executive Summary of the
recommended actions in the beginning of the proposal. In this part, students would be
judge on Content (7 marks) and Style & Presentation (7 marks).
??.............. END ??????
MPM502 PROJECT COST ANALYSIS AND APPRAISAL
2 May 2016
50% of total marks for the subject
Mr. Derek Poon
Question 1 (100 marks) (Approx. 6000 words)
You are expected to prepare the project proposal for a project of sufficient complexity and
value that you are familiar with to highlight the costing approach and appraisal of the project.
Your proposal should include:
A clear description of the project including the project charter with the project
A clear presentation of the scope of the project including the work breakdown structure
(WBS) of sufficient detail
A clear schedule for the project of sufficient detail to highlight the main milestones, the
critical path, schedule constraints etc of the project.
A clear costing for the project highlighting the approaches used in estimating the cost
of the various components of the project.
A clear budget for the project highlighting the contingencies applied and their reasons
A clear appraisal of the project highlighting the justification for the project. The
appraisal should include some numeric models and should clearly highlight why the
project should be accepted. The acceptance criteria chosen should also be
demonstrated to be realistic and reasonable for the project and organization
In the above appraisal, the student should show that the risk to the costing estimates
as well as any income stream (if any) have been taken into account and the project
remains viable based on the probability of the risk assessed.
Students would be assessed on the demonstration of their understanding of:
The overall project management processes
The concepts and tools of cost estimating and budgeting
The concepts and tools of cost analysis and appraisal of projects
The uncertainty and risk involved in projects
Students would also be assessed on the quality of their presentation and the ability to
communicate the project evaluation outcomes. In addition, marks would be given for
referencing and originality as per the standard assignment assessment form.
??.???.. END ??????
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