Question 1:
a) What is the underlying rationale for applying Discounting Cash Flow in project appraisal?
b) With short term interest rate at 7 percent, MauriSys Ltd decided to invest Rs 200 million out of its 2002 [year] retained earnings to acquire rights from OmegaSoft Products to monitor tourism performance. The marketing department submitted a report to Karina Zinta and estimated sales to be Rs 70 million for each of the three years of the life of the project. Sales revenue was Rs 70 million in 2006 and rose to Rs 71 million in 2007 when sales were halted pending an intellectual property right [IPR] infringement filed by Five-A Global Solutions, a foreign software firm. MauriSys lost the suit in 2008. The Court ordered it to pay damages of Rs 17 million to Five-A Global Solutions. Karina Zinta, the Managing Director, felt she was fired over the incident. Shortly afterwards Karina Zinta was heard saying “I’m a scapegoat. The attorneys at Maurisys did not do their homework. They should have checked the IPR. I projected annual sales of Rs 70 million per year for three years. Actual sales exceeded set targets for 2007 and those for 2008 would have at least been equal to the figure of 2002.”
Can you think why Karina Zinta was fired?
c) Aloha Solutions Ltd is envisaging the purchase of a new machine at the cost of half million rupees. The cost of capital is 10%. The machine has a useful life of eight years with a scrap value of Rs 75,000 at the end of its life. The machine will yield a stream of benefits of Rs 75, 000 during each of the first two years, and Rs 100,000 for each of the remaining years. Should the manager purchase the machine? Give reasons and show your calculations. What will be your recommendation if the scrap value cannot be sold?
Question 2:
a) Critically examine the salient features of the project approach to manage resources.
b) Which appraisal methods would you advise for public sector projects and why?