Harambee University

Faculty of Business and Economics

Post Graduate program
Department of MBA
Course Name: Project Management (MBA 741), 2024
Group Assignment (40%)
Course Manager: Ejarra B. (PhD).
General Directions
i. Be in a group of 5 students.
ii. Assignment References: Lecture notes and presentations of chapter 4 & 5 (Project cash flow
and Project Appraisal Techniques (Undiscouted and Discounted Methods) respectively )
iii. Page size, writing format & Style: 10-15 pages, 12 font size, font style: Times
New Roman, 1.5 spacing
iv. Assignment submission format: Assignment must be submitted in both hard copy
and soft copy. The soft copy should be emailed to [email protected].
v. The assignment questions are extracted from the case indicated below. The
justifications and answers for each case-question should consist of complete
analysis and discussion
vi. You are expected to use standard referencing styles (both in-text citations and
bibliography).
vii. Assignment due date: 17 July, 2024 (Note: No paper is accepted after the stated date) .

I. Read the following cases and answer the questions that follow

1. The LMF Project Company is considering two new machines that should produce considerable cost savings in its assembly
operations. The cost of each machine is $14,000 and neither is expected to have a salvage value at the end of a
4-year useful life. The LMF Project Company's required rate of return is 12% and the company prefers that a
project return its initial outlay within the first half of the project's life. The annual after-tax cash savings for
each machine are provided in the following table (6 pts):

Year Machine A Machine B

1 $5,000 $8,000
2 5,000 6,000
3 5,000 4,000
4 5,000 2,000
Total $20,000 $20,000

1
 Required:
a) Compute the payback period for each machine
b) Compute the net present value for each machine.
c) Which machine should be purchased?

2. Your firm is considering a project that requires an initial investment of $112,000 and will produce positive
cash flows of $2,400 per year in perpetuity (starting in one year). In addition to these cash flows, you must
consider the following: Assume that undertaking this project requires the use of an existing machine. If the
project is rejected, this old machine will last 9 more years before it needs to be replaced with a new machine.
However, if the project is accepted, the old machine will need to be replaced in 6 years with a new machine.
This new machine has more than enough capacity to handle the new project and all other existing projects, will
cost $45000 to purchase (either at t = 9 or t = 6) and will cost $8600 per year to operate for the next 12 years
(until t= 21 or t = 18). At the end of this 12-year period, an identical machine with the same cash flows will be
purchased. This will continue forever. Assume that the figures presented are real cash flows. Therefore, the
cash flows are the same if the replacement machine is purchased at time 9 or time 6. Use a 3% real discount
rate. As in the example discussed in class, ignore the cash flows associated with maintaining and operating the
existing machine (6 pts).

1. Initially ignore the “cost of using the excess capacity” of the old machine. Using the 3% real
discount rate, the initial investment of $112,000, and the expected cash flows of $2,400 per
year in perpetuity (starting in one year), what is the NPV of the project?
2. What is the equivalent annual cash flow (EAC) for the new replacement machine? Make sure
you indicate whether the EAC is negative or positive.
3. What is the NPV of the project (after taking into account the additional costs associated with
having to buy the new machine at the end of the 6th year instead of the end of the 9th year)?

3. The PIHATO9 newly initiated project is considering the purchase of a new piece of equipment for laying
sod. Relevant information concerning the equipment follows (4 pts):
➢ Cost of the equipment $180,000
➢ Annual cost savings from new equipment $37,500
➢ Life of the new equipment 12 years
➢ Expected Annual Net Income $15,000

2
 Required:
1. Compute the payback period for the equipment. If the company requires a payback period of
four years or less, would the equipment be purchased?
2. Compute the annual rate of return on the equipment. Would the equipment be purchased if the
company’s required rate of return is 14%?

4. KRC Paper Corporation is considering adding another machine for the manufacture of corrugated cardboard. The
machine would cost $900,000. It would have an estimated life of 6 years and no salvage value. The company
estimates that annual cash inflows would increase by $400,000 and that annual cash outflows would increase by
$190,000. Management has a required rate of return of 9%. Calculate the net present value on this project and discuss
whether it should be accepted or rejected. (1 pts)
5. Assume Project A has a present value of net cash inflows of $79,600 and an initial investment of $60,000.
Project B has a present value of net cash inflows of $82,500 and an initial investment of $75,000. Assuming
the projects are mutually exclusive, which project should management select and why? (2 pts)

6. Cornfield Company is considering a long-term capital investment project in laser equipment. This will require an
investment of $280,000, and it will have a useful life of 5 years. Annual net income is expected to be $16,000 a year.
Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 10%.
(Hint: Assume cash flows can be computed by adding back depreciation expense.)
(a) Compute the cash payback period for the project. (2 pts)

7. The Directors of the ETAF Football Club (a tax paying entity) are very concerned about the club's lack of
success over recent years. They are seriously considering the purchase of 20 new football robots that are being
manufactured in TENG.

These robots will replace 20 of the players the club fields each week. The robots cost $15,000 each, with an
additional charge for painting in club colours and transporting them to the club's home ground. This amounts to
$2,500 per robot. The robots will be depreciated on a straight line basis at twenty percent per annum.

The directors believe the robots, after being programmed to mark, handball and kick with both feet, can win most
of their games and so generate an additional $100,000 in gate receipts each year. Not having to pay the current list
of players will save the club an extra $30,000 a year. The robots will have a playing career of five years, after
which time their central processing units can no longer think or see. They will then be sold off (for a total of
$20,000) to a company that paints them white, puts whistles in their mouths, and uses them as umpires.
EHAF's required rate of return is 12 percent and the corporate tax rate is 30%.
Calculate:
a) Net Present Value (NPV) b) Internal Rate of Return (IRR)
d) Payback Period e) Present Value Index

7. Discuss with some examples the conceepts of the five stages of project team development processes in not less than
3 pages (10 pts) 3