SHAS4542FinalExamSemII20152016AnswerSchemePartBQ3 & Q4

Q3 (a) (b)
Q4a(i)

Year Pessimistic Most Likely Optimistic Used PVIF PV$

0 $ (65,000) $ (65,000) $ (65,000) $ (65,000) 1 $(65,000)
1 $ 14,000 $ 20,000 $ 22,000 $ 14,000 0.8333 $ 11 666
2 $ 19,000 $ 25,000 $ 30,000 $ 19,000 0.6944 $ 13 194
3 $ 27,000 $ 30,000 $ 36,000 $ 27,000 0.5787 $ 15 625
4 $ 32,000 $ 35,000 $ 39,000 $ 32,000 0.4823 $ 15 434
Rate 20% NPV $ -9 081

(4 marks)
The column labeled “Used” indicates the cash flow value used to calculate the net present
value.

Q4(a)(ii)
The profitability index is the sum of the discounted cash flows divided by the initial
investment. For this problem it is the sum of the PV’s for years 1-4 divided by $65,000 or:
55 919/65,000 = 0.86029 (2 marks)
Since the value is LESS than one, the project should be rejected (assuming everything else
is equal).
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Q4b(i)
Method Options
Grade Score
Category Weight A B C A B C
Consulting costs 20 1 2 3 20 40 60
Acquisition time 20 2 3 1 40 60 20
Disruption 10 2 1 3 20 10 30
Cultural differences 10 3 3 2 30 30 20
Skill redundencies 10 2 1 1 20 10 10
Implementation risks 25 1 2 3 25 50 75
Infrastructure 10 2 2 2 20 20 20
Total Score 175 220 235

In this example, Method A has the lowest score, so the decision-maker would regard it as
the best option.
(2 marks)
Q4b(iii)
Implementation risks = 10 and cultural differences = 25

Method Options
Grade Score
Category Weight A B C A B C
Consulting costs 20 1 2 3 20 40 60
Acquisition time 20 2 3 1 40 60 20
Disruption 10 2 1 3 20 10 30
Cultural differences 25 3 3 2 75 75 50
Skill redundencies 10 2 1 1 20 10 10
Implementation risks 10 1 2 3 10 20 30
Infrastructure 10 2 2 2 20 20 20
Total Score 205 235 220

Due to the changes in weights for implementation risks and cultural differences, Method
A is still the best option.

(2 marks)

Q4b(iv)
Using the initial values from problem 6, make the changes so that Method A
implementation risks = 3 and Method C cultural differences = 2.

Method Options
Grade Score
Category Weight A B C A B C
Consulting costs 20 1 2 3 20 40 60
Acquisition time 20 2 3 1 40 60 20
Disruption 10 2 1 3 20 10 30
Cultural differences 10 3 3 2 30 30 20
Skill redundencies 10 2 1 1 20 10 10
Implementation risks 25 3 2 3 75 50 75
Infrastructure 10 2 2 2 20 20 20
Total Score 225 220 235

The change for A’s implementation risks grade Method B is the best option

(2 marks)
Q4b(v)
c) Using the initial values from problem 6, insert Tax considerations = 15 and A = 3,
B = 2, and C = 1.
Method Options
Grade Score
Category Weight A B C A B C
Consulting costs 20 1 2 3 20 40 60
Acquisition time 20 2 3 1 40 60 20
Disruption 10 2 1 3 20 10 30
Cultural differences 10 3 3 2 30 30 20
Skill redundencies 10 2 1 1 20 10 10
Implementation risks 25 1 2 3 25 50 75
Infrastructure 10 2 2 2 20 20 20
Tax considerations 15 3 2 1 45 30 15
Total Score 220 250 250
Due to the insertion of tax considerations, Methods A now the best options.

(2 marks)

Q4b(ii)

Explanation Marks
(a) Category
Consultation cost
Acquisition time 4
Dusruption
Cultural differences (0.5
Skills redundancies each)
Implementations risks
Infrastructure
Tax

(b) Weight 1

(c) Score 1

Total marks 6