Njenge Limited is a big private company that undertakes consultancy activities and services in the field of building construction. Njenge has gained peoples’ confidence due to its seriousness, reasonable cost charged, provision of new designs, while using state-of-the-art technologies and materials in the construction process. Recently, Njenge has obtained a contract for a very challenging project, a type, which it has not embarked upon before - “Construction of a 5-star hotel on the border of a lake”. The site has been chosen because it provides a panoramic view of the beautiful and luxuriant scenery that would surround the proposed hotel. In a meeting held with members of the project team, the project manager voiced out that “applied research needs to be performed due to the complexity of the project”. Members of the project team suggested: “there should be frequent brainstorming sessions to develop a project option that would be acceptable to all of us, due to high-risk areas that may be encountered in the course of the project”. Among the major attractions at the hotel will be entertainment targeted at children below the age of ten (10) years e.g talking toy horses. In addition the company is considering producing an animated film to accompany the range of entertainment products. This is in accordance with the company’s long-term expansion plans, culminating in a stock exchange flotation in three year’s time. The film will take one year to make. In the year following that, sales of the film will commence. The following information is relevant has been provided. (i) Market research has already been carried out at a cost of $1·2 million. (ii) The services of a company specialising in animation will be required at a total cost of $520,000. 50% of these costs will be paid immediately with the remainder being paid in one year’s time. (iii) Two producers will be employed throughout the first year of the project. They will each be paid salaries of $120,000. (iv) Other production costs during the year are expected to be $650,000. (v) A film director will be employed immediately on a one-year contract at a cost of $160,000. (vi) The animated film is expected to generate revenues of $1·2 million in the first year of sales, $2·2 million in the second year, and $1·6 million in the third year. (vii) The two producers and the director will each be paid royalties from the film. These will be paid at the rate of 1·5% of gross revenues for EACH of the producers and 2% for the director. They will always be payable one year in arrears. (viii) Specialist equipment will need to be purchased immediately for the film production. This will cost $2·3 million but can be sold at the end of the year for $1·7 million. (x) The company’s cost of capital is 10% per annum. (xi) Assume that all cash flows occur at the end of each year, unless otherwise stated. Required: Calculate the project’s net present value and payback period at the company’s cost of capital. Conclude as to whether the company should proceed with the project, giving a reason for your conclusion.
Njenge Limited is a big private company that undertakes consultancy activities and services in the field of building construction. Njenge has gained peoples’ confidence due to its seriousness, reasonable cost charged, provision of new designs, while using state-of-the-art technologies and materials in the construction process.
Recently, Njenge has obtained a contract for a very challenging project, a type, which it has not embarked upon before - “Construction of a 5-star hotel on the border of a lake”. The site has been chosen because it provides a panoramic view of the beautiful and luxuriant scenery that would surround the proposed hotel.
In a meeting held with members of the project team, the project manager voiced out that “applied research needs to be performed due to the complexity of the project”.
Members of the project team suggested: “there should be frequent brainstorming sessions to develop a project option that would be acceptable to all of us, due to high-risk areas that may be encountered in the course of the project”.
Among the major attractions at the hotel will be entertainment targeted at children below the age of ten (10) years e.g talking toy horses. In addition the company is considering producing an animated film to accompany the range of entertainment products. This is in accordance with the company’s long-term expansion plans, culminating in a stock exchange flotation in three year’s time.
The film will take one year to make. In the year following that, sales of the film will commence.
The following information is relevant has been provided.
(i)
(ii) The services of a company specialising in animation will be required at a total cost of $520,000. 50% of these costs will be paid immediately with the remainder being paid in one year’s time.
(iii) Two producers will be employed throughout the first year of the project. They will each be paid salaries of $120,000.
(iv) Other production costs during the year are expected to be $650,000.
(v) A film director will be employed immediately on a one-year contract at a cost of $160,000.
(vi) The animated film is expected to generate revenues of $1·2 million in the first year of sales, $2·2 million in the second year, and $1·6 million in the third year.
(vii) The two producers and the director will each be paid royalties from the film. These will be paid at the rate of 1·5% of gross revenues for EACH of the producers and 2% for the director. They will always be payable one year in arrears.
(viii) Specialist equipment will need to be purchased immediately for the film production. This will cost $2·3 million but can be sold at the end of the year for $1·7 million.
(x) The company’s cost of capital is 10% per annum.
(xi) Assume that all cash flows occur at the end of each year, unless otherwise stated.
Required:
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