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HELP MASTER OF PROJECT MANAGEMENT MPM502 PROJECT COST ANALYSIS-(Answered)

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Question

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]

 

INSTRUCTIONS TO CANDIDATES

 

Candidates shall be deemed to have been notified of these instructions when they commence/enrol for

 

a subject. There are three (3) assessment items: one (1) examination (exam) and two (2) assignments.

 

To pass the subject, a candidate is required to obtain at least 50 marks (out of 100) in each. The official

 

subject grade is awarded based on total weighted marks out of 100, (see weighting below). The date

 

and time of the exam date, assignment word limits and submission date are as follows:

 

Seminars

 


 

Assessment

 

Exam

 


 

Main Seminar: 26 Mar 2016

 


 

Date and Time of Exam/

 

Assignment Submission Date

 

Saturday, 2 Apr 2016

 

Open Book

 

10:00 a.m.-12.30 p.m

 


 

Assignment I

 

Assignment II

 


 

Monday, 2 May 2016

 


 

Weekday evening seminar and second

 

main seminar dates to be confirmed

 

during main seminar

 

Duration/

 

Weighting

 

Word Limit

 

2.5 hours

 


 

20%

 


 

4,000

 


 

30%

 


 

6,000

 


 

50%

 


 

Normally, exams are held at the HU Exam Centre, 4th Floor, Wisma HELP, Jalan Dungun, Damansara

 

Heights. The specific venue will be posted at the ELM Notice Board at Level 10.

 

SUBJECT ENROLMENT

 

Enrolment for a subject is based on a candidate?s attendance at the exam and fee payment. Candidates

 

who wish to be enrolled but are unable to sit for the scheduled exam must have a valid reason for non?

 

attendance, (usually, only serious illness -with supporting documentation- will be acceptable). They

 

shall notify ELM in writing of this either before the exam or latest by the next working day, failing which,

 

they will not be enrolled. Candidates with approval for non-attendance shall normally sit for the

 

supplementary exam (at a nominal fee) with candidates of the next intake. The official grade shall be

 

released only after the result for this is obtained.

 

ASSIGNMENT SUBMISSION

 

These shall be comb bound with the STANDARD COVER SHEET at the front of the assignment and shall

 

be submitted to ELM office in person, by post or courier or deposited into the ELM Post Box on the 10th

 

Floor by the submission date. Submission by fax or e-mail is not acceptable. One set of Quantitative +

 

Qualitative Assessment Forms ? with subject and student details at the top, duly completed ? shall be

 

inserted beneath the cover sheet of, (not bound together with), EACH assignment. Assignments shall

 

have full citation of references and a selected bibliography. Plagiarism and failure to cite references will

 

attract penalties.

 

Two days grace is given for assignment submission. Extension shall not be given unless:

 

1. there is valid reason supported by documentation (only serious illness and compassionate

 

circumstances shall normally be considered but work pressure will not be acceptable); &

 

2. the request for extension is made in writing before the scheduled submission date, and ELM

 

approval obtained.

 

Unless approved, late submissions shall not be assessed and the candidate may be awarded a ?Fail?

 

grade for the subject.

 

E L M G R A D U A T E S C H O O L

 

10th Flr, Wisma HELP, Jalan Dungun, 50490 Kuala Lumpur Tel: 03 2711 2000 Fax: 03 2711 2331

 

E-mail: ngwy@help.edu.my

 

awkh@help.edu.my

 


 

MPM502 PROJECT COST ANALYSIS AND APPRAISAL

 

ASSIGNMENT I

 

Due date

 


 

:

 


 

2 May 2016

 


 

Word limit

 


 

:

 


 

4,000 words

 


 

Weighting

 


 

:

 


 

30% of total marks for the subject

 


 

Facilitator

 


 

:

 


 

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:

 

1.

 


 

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.

 


 

2.

 


 

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.

 


 

3.

 


 

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.

 


 

4.

 


 

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.

 

2

 


 

Exhibit 3

 


 

Free Cash Flows and Analysis of Proposed Projects4 (all values in Euro millions)

 

1

 

2

 

3

 

4

 

5

 

Expand Truck

 

Fleet

 

(note 3)

 


 

Project

 

Investment

 

Property

 

Working Capital

 


 

New Plant

 


 

Expanded

 

Plant

 


 

20.00

 

2.00

 


 

25.00

 

5.00

 


 

10.00

 


 

(11.40)

 

(7.90)

 

3.00

 

3.50

 

4.00

 

4.50

 

5.00

 

7.00

 

6.50

 

6.00

 

5.50

 

25.70

 

6

 

4

 

15.9%

 

8.0%

 

7.9%

 

5.41

 

8.93

 

1.33

 


 

(30.00)

 

2.00

 

5.00

 

5.50

 

6.00

 

6.25

 

6.50

 

6.75

 

5.00

 

5.25

 

5.50

 

23.75

 

6

 

5

 

11.3%

 

10.0%

 

1.3%

 

0.99

 

1.87

 

0.30

 


 

(10.00)

 

1.55

 

1.75

 

2.00

 

2.25

 

2.50

 

2.50

 

2.50

 

2.50

 

2.50

 

2.50

 

12.55

 

5

 

5

 

16.6%

 

10.0%

 

6.6%

 

2.96

 

3.33

 

0.54

 


 

Year

 

1

 

2

 

3

 

4

 

5

 

6

 

7

 

8

 

9

 

10

 

Undiscounted Sum

 

Payback

 

Maximum Payback Accepted

 

IRR

 

Minimum Accepted ROR

 

Spread

 

NPV at Corp WACC (10.6%)

 

NPV at Minimum ROR

 

Equivalent Annuity (note 2)

 

1

 

2

 


 

Artificial

 

Sweetener

 


 

15.00

 


 

Automation

 

and Conveyer

 

Systems

 


 

7

 


 

8

 


 

Eastward

 

Expansion

 

(note 5)

 


 

Southward

 

Expansion

 

(note 5)

 


 

7.00

 


 

20.00

 

Expected Free Cash Flows (note 4)

 

(5.00)

 

(7.00)

 

(20.00)

 

(5.00)

 

1.375

 

3.50

 

(5.00)

 

1.375

 

4.00

 

3.00

 

1.375

 

4.50

 

3.00

 

1.375

 

5.00

 

4.00

 

1.375

 

5.50

 

4.50

 

1.375

 

6.00

 

5.00

 

1.375

 

6.50

 

5.50

 

1.375

 

7.00

 

6.00

 

1.375

 

7.50

 

6.50

 

1.375

 

8.00

 

22.50

 

6.75

 

37.50

 

7

 

6

 

5

 

6

 

4

 

6

 

17.3%

 

14.6%

 

21.4%

 

12.0%

 

8.0%

 

12.0%

 

5.3%

 

6.6%

 

9.4%

 

5.21

 

1.24

 

11.99

 

3.88

 

2.23

 

9.90

 

0.69

 

0.33

 

1.75

 


 

9

 


 

10

 


 

11

 


 

Snack Foods

 


 

Inventory

 

Control

 

System

 


 

Strategic

 

Acquisition

 

(note 6)

 


 

15.00

 

3.00

 


 

15.00

 


 

20.00

 


 

30.00

 

10.00

 


 

(20.00)

 

3.00

 

3.10

 

3.20

 

3.30

 

3.40

 

3.50

 

3.60

 

3.70

 

3.80

 

3.90

 

14.50

 

7

 

6

 

10.8%

 

12.0%

 

-1.2%

 

0.17

 

(1.02)

 

(0.18)

 


 

(18.00)

 

3.00

 

4.00

 

4.50

 

5.00

 

5.00

 

5.00

 

5.00

 

5.00

 

5.00

 

5.00

 

28.50

 

5

 

6

 

20.5%

 

12.0%

 

8.5%

 

8.95

 

7.31

 

1.29

 


 

(12.00)

 

5.50

 

5.50

 

5.00

 


 

(15.00)

 

(20.00)

 

5.00

 

9.00

 

11.00

 

13.00

 

15.00

 

17.00

 

19.00

 

21.00

 

59.00

 

134.00

 

5

 

6

 

28.7%

 

12.0%

 

16.7%

 

47.97

 

41.43

 

7.33

 


 

4.00

 

3

 

4

 

16.2%

 

8.0%

 

8.2%

 

1.16

 

1.78

 

0.69

 


 

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

 

3

 

This reflects Euro 11 million spent both initially and at the end of year 1

 

4

 

Free cash flow = incremental profit or cost savings after taxes + depreciation - investment in fixed assets and working capital

 

5

 

Franchisees would gradually take over the burden of carrying receivables and inventory

 

6

 

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

 


 

:5

 

:5

 

:5

 

:5

 

:5

 

:5

 

:5

 


 

Style & Presentation (15 pts)

 

Language

 

Framework and Diagrams

 

Length

 


 

:5

 

:5

 

:5

 


 

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%.

 

a.

 


 

What is real options analysis? What are the real options that a project can have?

 

(10 marks)

 


 

b.

 


 

Should SmarTone bid for another 1800 MHx spectrum today, of should it wait a year

 

before deciding whether to bid? (5 marks)

 


 

c.

 


 

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

 

follows:

 

Year

 

Cash Outflows ($)

 

Cash Inflows ($)

 

Net Cash Flows ($)

 

0

 

-200,000

 

0

 

-200,000

 

1

 

-100,000

 

180,000

 

80,000

 

2

 

-100,000

 

180,000

 

80,000

 

3

 

-100,000

 

180,000

 

80,000

 

d.

 


 

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.

 

e.

 


 

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 accepts

 

60% Probability

 

Customer do not accept

 

40% Probability

 


 

Year 0

 

-$200,000

 


 

Year 1

 

$150,000

 


 

Year 2

 

$150,000

 


 

Year 3

 

$150,000

 


 

-$200,000

 


 

-$25,000

 


 

-

 


 

-

 


 

5

 


 

f)

 


 

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.

 

g)

 


 

Given these information, should SmarTone invest in another 900 MHz spectrum

 

today? (5 marks)

 


 

h)

 


 

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 ??????

 


 

6

 


 

MPM502 PROJECT COST ANALYSIS AND APPRAISAL

 

ASSIGNMENT II

 

Due date

 


 

:

 


 

2 May 2016

 


 

Word limit

 


 

:

 


 

6,000 words

 


 

Weighting

 


 

:

 


 

50% of total marks for the subject

 


 

Facilitator

 


 

:

 


 

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:

 

1.

 

2.

 

3.

 

4.

 

5.

 

6.

 


 

7.

 


 

A clear description of the project including the project charter with the project

 

objectives

 

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

 

concerned.

 

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:

 

1.

 

2.

 

3.

 

4.

 


 

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 ??????

 

7

 


 

 

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