1. Describe and explain the meaning of each of the following project type and illustrate your explanation with examples. (3 marks) Diversification Expansion 2. Mr. Salim runs a carpentering business in his village. Mr. Salims business has expanded, with revenue now reaching OMR 40,000 per year. Mr. Salim is considering moving his business into town centre premises, and employing another carpenter, who would cost OMR 6,000 per year. He has found premises that could be leased for OMR 3,500 per year payable in advance. Mr. Salim currently advertises his business in the local newspapers and business directories, at a cost of OMR 1,000 per year payable in advance. Mr. Salim will carry on with this advertising, but he will also need extensive one off advertising to promote the move to the new premises. This one off advertising in the local newspapers will cost OMR 2,000, which will be paid immediately. In addition to advertising the move in the local newspapers, Mr. Salim could advertise the move on the local radio. The cost of this would be OMR 5,000, also payable immediately. Mr. Salim believes that having a town centre presence and the associated publicity in the local newspapers and local radio will increase revenue, by 45%. Overheads, excluding advertising, would increase to a total of OMR 4,000 per year. Overheads currently charged to the business are OMR 1,500 per year. Direct costs such as are budgeted at 5% of revenue. The cost of capital is 10% per annum. Determine the relevant cash flows associated with the proposed project. (4 marks) 3. Noor Taxis Co. owns and runs 350 taxis and had sales of OMR 10 million in the last year. Noor Taxis Co. is considering introducing a new computerized taxi tracking system. The expected costs and benefits of the new computerized tracking system are as follows: a. The system would cost OMR 2,100,000 to implement. b. Depreciation would be provided at OMR 420,000 per annum. c. OMR 75,000 has already been spent on staff training in order to evaluate the potential of the new system. Further training costs of OMR 425,000 would be required in the first year if the new system is implemented. d. Revenue are expected to rise to OMR 11 million in Year 1 if the new system is implemented, thereafter increasing by 5% per annum. If the new system is not implemented, revenue would be expected to increase by OMR 200,000 per annum. e. Despite increased revenue, savings in vehicle running costs are expected as a result of the new system. These are estimated at 1% of total revenue. f. Six new members of staff would be recruited to manage the new system at a total cost of OMR 120,000 per annum. g. Noor Taxis Co. would have to take out a maintenance contract for the new system at a cost of OMR 75,000 per annum for five years. h. Interest on money borrowed to finance the project would cost OMR 150,000 per annum. i. Noor Taxis Co.'s cost of capital is 10% per annum. Determine the relevant cash flows associated with the proposed project. (4 marks) 4. Sultans Hospital is a private hospital providing a range of care to patients. It is currently appraising a major capital investment project. The hospital directors are considering opening up a specialist fertility department in a wing of the hospital that is currently unused. If the decision is made to proceed with the investment, the equipment would be bought and the staff would be recruited immediately. Treatment and testing of patients could then start straight away. In assessing the viability of capital projects, the hospital currently uses a target accounting rate of return of 20% (based on the average investment over the period) and a target payback period of four years. It will undertake a project only if BOTH the accounting rate of return and the payback period meet or exceed the targets. The following data are available for this proposed investment. OMR000 Cost of specialist equipment ??? Annual increased revenues 5,000 Annual increased staff costs (1,500) Annual increased other costs* (1,000) * No depreciation is included in these figures. After five years, it is thought that most of the equipment would have become outdated and would have a residual value of only OMR 0.5 million. The companys cost of capital is 10% per annum. Required Calculate the accounting rate of return and the payback period for the project and recommend on a purely financial basis whether the project should proceed. (4 marks)