Your Task

Your task is to carry out an investment appraisal and identify the best investment opportunity based on your conclusions.

Paragon systems is a financial technology company who has been approached by the Chinese government to offer FinTech solutions to Chinese Banking sector for the duration of 5 years.

The data on which you will base your investment appraisal is available to download here.

The Chinese government proposed an attractive annual payment, which includes a year-on-year increase (see student data file).

If Paragon accepts the project, they will need to invest in creating a new operation unit in China. The hardware used in the unit will be depreciated using the straight-line method. At the end of year 5, the hardware of the unit will be sold for the amount indicated in the student data file.

The annual operating costs will be a % (see the investment data you have downloaded for the exact %) of the annual revenues proposed by the Chinese government.

In year 1 there will be the need for working capital investment (see the investment data).

The working capital investment will be partially recovered at the end of the project in year 5 (see the investment data).

Assume that all revenues and costs are received and paid in cash at the time they occur.

Assume no cost of borrowing (no interest expense).

The tax rate is 20%.

The required rate of return is 11%.

Required

You are sitting at the executive board of Paragon Systems and you have been assigned to appraise the project using all available information.

Specifically, you have been asked to do the following:

Part A: Conduct investment appraisal using the following methods:

NPV

IRR

PP

Part B: Conduct a sensitivity analysis on the impact on NPV from:

+5% the operating costs; and

+5% initial investment cost.

Part C: Write a report providing a clear recommendation as to whether Paragon Systems should accept or decline the offer made by the Chinese government. In your report, you should acknowledge the limitations of the methods used and reflect on the relevant theory. Also, you should be able to show awareness of the non-quantitative factors that might be relevant in the final decision for this potential investment opportunity.

Use data in the table below.

Student Registration Initial investment Residual Operating costs as % of working capital working capital required in year 1 released in year 5 Year 1 Year 2 Year 3 Year 4 Year 5 value revenues) 2,362,50020,200 2,340,00020,400 2,317,50 20,600 2,295,000 20,800 2,362,50020,200 2,317,500 20,400 2,340,000 20,600 2.-95,00020,800 2.362,500 20,200 2,317,500 20,400 2,340,00020,600 2,295,000 20,8O 2,362,500 20,200 2,317,500 20400 2,340,00020,600 2,295,000 20,800 2,362,500 20,200 2,317,500 20400 2,340,00020,600 2,295,00020,800 2,362,50020,200 2,317,500 20400 2,340,00020,600 2,295,00020,800 2,362,50O 20,200 2,317,500 20400 2,340,00020,600 2,29,0020,800 2.362.50020,200 2,317,500 20,400 16,320 808,000 904,960 1,013,5551,135,1821,271404 16,480816,000 913,920 1,023,5901,146421 1,283,992 16,640824,000 922,880 1,033,626 1,157,6611,296,580 16,320808,000 904,960 1,013,555 1,135,12 1,271404 16,480816,000 913,9201,03,590 1,146,421 1,283,992 16,640 | 824,000 | 922,880 | 1,033,626 | 1,157,661 11,2 6,580 16,320808,000 904,960 1,013,55S 1,135,1821,271404 16,480 816,000 913,920 1,023,5901,146,4211,283,992 16,640824,000 922,8801,033,6261,157,661 1,26,580 16,320 808,000 904,960 1,013,555 1,135,182 1,271404 16,480816,000 913,9201,023,5901,146,4211,283,992 16,640824,000922,8801,033,626 1,157,6611,6,580 16,320 818,000904,601,013,5551,135,1821,271404 16,480816,000 913920 1,023,590 1,1464211,283,992 16,610824,000 92,8801,033, 16,320 |8,000 | 904,960 | 1,013,555 | 1,135,182 | 1,27,404 16,480816,00 913,920 1,023,590 1,146421 1,283,992 16,640824,000 92,8801,033,6261,157,661 1,936,580 16,320808,000904,9601,013,555 1,135,1821,71AM 16,480816,000 913,920 1,023,590 1,146411,283,992 16,640824,000 922,880 1,033,6261157,6611,296,580 16,320808,000 904960 1,013,5551,135,1821,271404 16,480816,000 913,920 1,03,5901,146421 1,283,992 16,640 824,000 922,880 1,033,6261,157,661 1,236,580 16,320808,000 904,9601,013,555 1,135,182 1,271404 16,480816,000913,9201,023,5901,146,4211,283,992 16,640824,000 922,880 1,033,626 1,157,661 1,296,580 16,320 808,000 904,960 1,013,555 1,135,182 1,271404 16480816,000913,9201,03,590 1,146421 1,283,992 16,640824,000 92,880 1,033,6261157661 1296,50 115,000 110,000 117,000 6261,157,6611,296,580 81,600 120,000 118,000 120,000