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New information system Jackson's current system that is used to provide specialized services to its clients' needs to be updated. The company is considering an investment in a more modern system and two possible alternatives have been proposed as outlined below. Golden o-ackae olden Package II raft fi_ res '000 EE_II___-_ I-_-IJ_____ umulative orkjn_ Ca ital 50: 700 20: I : _-I_J-E- |-__00___ --- _-____ _-__-_- All of the above estimates have been prepared in terms of present day cost and prices. Assume that cash flows arise at the end of each period. In addition . Revenues are expected to rise by 4% in price terms per year from year 1 (start of year 2) the budget estimated selling price at start was 120. . Overheads and working capital are expected to rise by 4% per year from year 1 (start of year 1) . The cost of Segment A and Segment B are expected to rise in line with inflation of 4% per year from the beginning of year 1 . The working capital is cumulative and will be recouped at the end of year 5 . The cost of System Experts (SE), who have come from the Kenya have not been taken into consideration in the forecast and are as follows: System Expert 1 (SE1): Will be paid 130 per hour and expected number of hours for SE1 are 1,300hrs. The rate paid is expected to rise in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 3% per year, every year from year 2 onwards. System Expert 2 (SE 2): Will be paid 125 per hour and expected number of hours for SE2 are 1,400hrs. The rate paid is expected to go up in line with inflation at 4% per year from year 2 and the number of hours is expected to reduce by 4% per year, every year from year 2 onwards. If Jackson Limited invests in Golden Package, then the discount rate that would be required to assess the NPV would be 10%. The table above shows the estimated outgoings and inflows for the project. Premier Centre The Sales Manager of Jackson has just informed your company that they plan to open a centre in the UK, with a possible start date of business on 1 August 2020. You have also been informed that to start with, the company will only sell 2 new types of service packages, that of Basic Level (BL) and the Professional Level (PL). The intentions here is to test the market and check whether they can achieve break-even in the same period. A recent market research has suggested that these two are the most popular systems and will be offered at 350 for BL and 450 for PL. You have also been provided with the following information regarding the costs and estimated sales for the period mentioned above. Jackson Limited intends to put in 6,000 as start-up capital and plan to sell a total of 1,200 (combined) of BL and PL for the same period. They are not sure which of the two types of service packages will produce the most profits for Jackson. Total budgeted sales for each month are as follows: August 400, September 400 and October 400, of which 40% of each month will be for BL. You will be required to assess the best product combination of sales for the period. To help with the setup of the new Centre, the company has just concluded a deal with one of the high street banks to get a loan of 30,000 on the 1st of August 2020. The interest on this loan will be 3.5% to be paid every month. The company will be required to make 12 equal payments to repay the loan starting end of September 2020. Financial information As mentioned above the company plans to sell a total of 1,200 units of the service packages between 1 Au-ust and October 2020. The fixed costs forthe eriod are as below: I_ __ I_ E_ I_ I_ -_ ervice - acka_e I: L I From their costs estimates, the variable costs of the services are 150 for the BL and 200 for the PL. The fixed costs are forthe whole period, so they are not affected by the level of service. However, the variable costs will increase with services output (ie sales output multiplied with variable cost per service package). Revenue from the sale of BL and PL will be on the basis of 40% cash in the same month, and the remaining 60% credit to be paid the following month. Requirement: You will be required to write a management report to the management of Jackson Ltd directors, discussing the following issues: . Analyse the Investment proposals by using NPV and provide recommendations. You should also briefly comment on other investment proposal techniques that Jackson Limited may use, and the limitations of using those techniques . A computation of your breakeven analysis and the cash budget for the first 3 months
