Accounts and Finance

Quantitative Investment Appraisal

Average rate of return

Average rate of return is a percentage that shows the amount of profit someone gets back from an investment. This takes into account the profit and not the time.

                           [Net return (profit) per annum / Capital Outlay (cost)] x 100 = ARR

Payback Period

The Payback Period is the amount of time a firm would take to recover the investment made. This takes into account the time and not the profit.

                           [Amount required / Net Cash Flow in year] x 12 = Payback Period

In the case UWP

There is not enough information to make an Average Rate of Return (ARR) or a Payback Period as the case does not explain how much profit would the hospital or the University generate. Maybe a reason why they do not tell us that information is because the intention of those projects are not financial but to be healthy to the community. Also we do not have a net cash flow forecast for each project so the Payback Period is not available for students. In case the IBO gives a cash flow, we just need to analyse the amount of profits the projects are going to be generating to put what we need in a formula.

In the case of Kos

We know how much profits the options available for him are going to be generating, what we do not know is how much does he have to invest so neither the ARR nor the Payback Period can be made.

Qualitative Investment Appraisal

Colonel Michael Donovan had the responsibility for investigating the feasibility of the two projects (Hospital/University). “He calculated that both projects would cost the same (Appendix 3). As a result, the decision about whether to build a university or a hospital WOULD NOT BE BASED UPON COST, BUT UPON OTHER FACTORS” (51-56) When we evaluate the two projects, it is important to consider the nature of this case: Qualitative Factors (those that cannot be measured) are really important since the purpose of the Mission is not to generate profit (money), but to create the adequate environment for social and political stability, peace and human development.

Some important qualitative factors are:

• Urgency: What does Loyka need more urgently: a Hospital or a University?

- A country that recently suffered a civil war is usually a country that faces political instability, economic crisis, lack of infrastructure and hygiene.

- Education and health are both considered basic needs.

- There may be many people with permanent injuries or disabilities caused by the violence of the civil war. They need medical attention urgently.

- Unhygienic environments provoke that diseases appear and spread. There may be many people who is sick and need medical attention.

- There has been “human capital flight” (brain drain). How will Loyka rebuild itself if it does not have the human resources needed?

- Education is considered indispensable for the future of a country. A nation needs educated people in order to be civilized, free, democratic, etc.

- “Education makes a people easy to lead but difficult to drive: easy to govern, but impossible to enslave” Henry Brougham

- A Hospital can attend people of any age. A University focuses on educating young people.

- The benefits of a hospital will be almost immediately palpable (short-term, medium-term). People will be able to appreciate the benefits of a university in the future (long-term).

- The construction of the University (25weeks) will take less time than the construction of the Hospital (30weeks).

- Include opinion of government...

• Objectives: How does each project help to achieve the objectives of the Mission?

- Image: Does the project put the image of the UWP at risk?

--- “[...] a university built by the UWP would become a symbol of foreign intervention in Loyka and would make it a target for critics of the government and of the UWP presence in the country” (80-83)

- Workforce: What is the impact on the workforce (troops)?

--- “The project also had the support of the troops, who would feel empowered and would welcome working in new flexible matrix structures.” (90-91)

• Environment -> See PESTLE

• Ethical reasons -> See Ethical objectives

Important information for qualitative investment appraisal: 68-116

Working Capital / Circulating Capital

Working capital is the amount of money needed to pay for the day-to-day trading of a business. It reflects how well a business is performed.

                             Working capital = current assets - current liabilities

In this case on Appendix 5a can be find useful information for calculating the working capital of Kos’ business.

Option 1: All figures $ in dollars per month

     Gross profit (current asset) - Gas and vehicle maintenance, Rent of storage facility, interest(current liabilities) =                       

                                               $200 - $50 = $150

Option 2:

    Gross profit (current asset) - Gas and vehicle maintenance, Rent of storage facility, interest (current liabilities) =                                                                                         
                                       $2200 - ($400 + $200 + $100) = $1500

Working Capital Cycle

The working capital cycle are intervals between payments made by a business and the receipt of cash.

Lag 1: Purchase resources from suppliers on credit, which means obtaining the resources without having to pay for them immediately.

Lag 2: Resources turned into products.

Lag 3: Finished goods before they are sold

Lag 4: Goods sold to customer allowing customers to pay later.

In this case that time lags are present in Kos’ business and the UWP new project.

In Kos' business

Lag 1: Purchase of eggs, poultry, vegetables and other produce from local farms (61)

Lag 2: Do not transform the resources only resell them

Lag 3: Amount of time that Kos maintains the goods before selling them to the officers of dining hall. (62)

Lag 4: The case do not specify how the officers pay him.

Cash injection: (If expansion) Bank loan (130) and increasing working capital (156)

Cash drains:(If expansion) A new lorryand increase stockimpact in capital as wellexpenses would go up

In the UWP Lag 1: Would be purchasing furniture and equipment for the construction of the new project.(Appendix 3)

Lag 2: Would be the construction time of the new project.

Lag 3: Time while people who would need the service provided by the new project arrive

Lag 4: Time while people would pay for the service that was provided

Cash injection: Capital that would be invested in the new project Cash drains: Land

Every business has different working capital needs depending their size, stock levels, debtors and creditors. If Kos maximize the scale of operation of his business (option 3) becoming a wholesaler would require an increasing working capital ( 156). Increasing the scale of operation of his business would need to manage higher stock levels since would become just-in-case. (137). Besides expanding his business would imply a time between buying stock financed by trade credit and finished products since he would need the bank loan.

Working capital and profit are not the same! Kos’ expansion would be profitable as long as the UWP Mission remains in Loyka but if Kos do not has the enough working capital problems would arrive.

Herzberg

Herzberg’s theory shows two factors that influences in the causes of feelings of satisfaction or dissatisfaction at work. This factors are motivators or hygiene factors.

The motivators give workers job satisfaction, such as recognition for their effort. The hygiene factors can lead to workers being dissatisfied, such as pay and conditions, improving these factors should remove dissatisfaction. Because Herzberg’s ideas are often linked with job enrichment, this theory is applied with the creation of a new hospital or a new university campus that would remotivate the The Olive Hats by providing a change of routine, by giving them a sense of achievement, and by buildingpositive relationships with the local population. (47-49)

Taylor

Taylor’s Scientific Management says that money is what motivated people at work. Taylor felt that workers should receive a fair day’s pay for a fair day’s work, and pay should be linked to output through piece rates. Although that this may be a good motivator for the soldiers, the salaries aren’t set by the colonel, they are set by the UWP itself, so financial rewards are not an option that could be taken to motivate workers.

Glossary

Na (Later)

Categories

• Business Organization and Environment
• Human Resources
• Accounts and Finance
• Marketing
• Operations Management

References

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