Save:
Favorite
Share:
Calculator Allowed: No

Question

Answer

Transcription of this question: 5.Jacob wants to introduce the IT centre and internet access as soon as possible. He hasfound a donor who is willing to pay for the installation of an internet connection and for halfof the monthly subscription. Jacob also has an estimate of the cost to convert the classroomand he thinks that MSS can afford it However, the staff at the school do not think the ITcentre is a good idea as it is risky due to possible construction problems. They think thatthere are better ways to spend the money and everyone is worried that they will be expectedto help out with the construction work. The teachers do not want to lose a classroom.The staff want Jacob to consider the purchase of an old minibus. At the beginning of theterm some students have difficulty travelling to the school. Expensive taxis also have to beused to bring supplies from the town to the school and to take anyone who is sick into townfor medical treatment. As well as saving costs and offering greater convenience, the minibuscould carry excess food grown by the students to town for sale. Teachers would have totake turns driving the minibus and sometimes undertake repairs on it. However, the minibuswould be helpful to the teachers and Mrs K whenever they needed to visit the town.Jacob has undertaken research into the two possible options of the IT centre and theminibus. He knows that only one option is possible at the moment. He has drawn up adecision tree to compare the two options depending on various outcomes.Figure 1: Decision tree for IT centre and minibusIT centrecost $1500Minibuscost $800Predictedoutcome$2800Predictedoutcome$1965ProbabilityOptimistic 0.3Most likely 0.4Pessimistic 0.3Optimistic 0.4Most likely 0.5Pessimistic O. 1Expectedreturn$2500$2600$1650$1000(Question 5 continued)He has also carried out an investment appraisal based on the most likely outcome, with thefollowing results:Option 1: convert classroom to IT centreCost of building the IT centre: $1500• Annual increase in income from attracting additional students: $1200Additional annual costs for subscribing to internet access: $500Lifetime of the IT centre: five years• Average rate of return (ARR) – 26.7%Option 2: the minibusCost of buying the minibus: $800• Annual savings on taxi fares: $700• Additional annual costs (fuel and other costs): $15()Lifetime of the minibus: three years• Average rate of return (ARR) – 35.4 %Net present value (NPV) at10% discount $1153.Net present value (NPV) at10% discount $567Using the information above and in Figure 1, recommend either Option 1 or Option 2 forMSS. You will find it useful to calculate the payback period for the two options.[20]

Leave a Reply