1 Mr. Lamk work for a large, successful organisation, but lately many of the IT projects have experienced disappointing results. Mr. Lamk along with his friend Mr. Mohammed have been put on the steering committee to improve the selection process. The organisation has decided that any new projects selected for implementation must first meet strict financial measures. It has set minimum values for ROI, NPV and payback period. The organisation has analysed two possible projects and has identified financial projections for each as follows: Showing the working experience of Mr. Lamk and his colleague Mr. Mohammed, consider the financial evaluation of the following projects. At the end of Year 0 there is an outlay of 20,000 OMR/- for project A and 25,000 OMR/- for project B. In the following five years the cash inflow is estimated to be as follows: Year Project A 0 -20,000 OMR/- Project B -25,000 OMR/- 1 1,500 OMR/- 4,000 OMR/- 2 3,500 OMR/- 5,000 OMR/- 3 4,000 OMR/- 6,000 OMR/- 4 8,000 OMR/- 9,000 OMR/- 5 12,000 OMR/- 10,000 OMR/- (i) Projects should be selected based on the value they will bring to the organisation. Explain what value means in this sense. (ii) Calculate the payback period for each project (project A and project B). (iii) Calculate the return on investment (ROI) for each project (project A and project B). You should use the following formula and show all calculations. ROI average annual profit x 100 total investment Page 2 of 6 (iv) Calculate the net present value (NPV) for each project (project A and project B), using a discount rate of 10% (use the discount table below). Table for Discount rate Year 7% discount 8% 9% 10% discount discount discount 11% discount 12% discount Year 1 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 Year 2 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 Year 3 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 Year 4 0.7629 0.735 0.7084 0.683 0.6587 0.6355 Year 5 0.713 0.6806 0.6499 0.6209 0.5935 0.5674 Year 6 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 Year 7 0.6227 0.5835 0.547 0.5132 0.4817 0.4523 Year 8 0.582 0.5403 0.5019 0.4665 0.4339 0.4039 Year 9 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 Year 10 0.5083 0.4632 0.4224 0.3855 0.3522 0.322 (V) If the organisation can only choose one project to work on, recommend with justification your choice of project (project A or project B) for the organisation. [5] [3] [5] [8] [4]