The New Construction Group plc is planning to update its computer systems.
It has identified the most appropriate computer system for its needs which will cost £35m. The additional cost for system support will be £4m per annum and will be outsourced. An additional £2m training costs will be incurred during the first year.
The introduction of the system will result in the closure of the group’s own technical department. This will save £15m per annum but there will be immediate one off redundancy costs of £5m.
Certain items of office and equipment will then be redundant and will be sold for £3m in year one. The new equipment will have a five year life and will have no trade in value at the end of this period. The Group’s internal rate of return is 18% and discount factor is 11%.
(a) Calculate: (i) the simple payback period for the project (ii) the discounted payback period for the project (iii) the Net Present Value (NPV) (iv) the internal rate of return
(b) Discuss the merits and limitations of the techniques used in (a) above. [15%]
(c) Discuss non-financial reasons for progressing with the project. [10%]
(d) Discuss whether they should go ahead with the project, taking into account non-financial factors, NPV and IRR.
(e) Due to the increase in efficiency caused by the new computer system this medium sized building company is looking to expand and grow the business but is not sure in which direction to go. The options considered are to merge with a similar sized company that has different expertise which would allow entry into new markets or the acquisition of a smaller company that has similar expertise allowing for expansion in the market presently trading in. In either case the company will be classed as a new company. To develop the business the company needs to borrow money to obtain new premises, to advertise and install a computerised costing and project management systems. Explain the advantages and disadvantages of merging with another company and the acquisition of another company. [30%]
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