Question

Question 4

The Government Schools Board is inviting tenders for a contract to provide IT services to schools. A panel of senior managers from the Schools Board will assess the tenders and recommend a preferred tenderer to the Head of the Education Department.

Part a)

Suppose there are two tenders received with the following data:

Tender 1 (Whatis) Tender 2 (Hacker)

Costs Year 1 $250,000 $350,000

Costs year 2 $250,000 $250,000

Costs year 3 $250,000 $150,000

Government departments use a cost of capital of 7%

Required

1) What methods could be used to assess the tenders? Which method would you recommend?

2) Which tender would you accept? Why? (Remember, this is a contract for the total amount the schools board needs to pay to the successful company)

4+6 = 10 marks

Part b)

The Hacker Company submits tender 2 to the Schools Board. In order to gain the special knowledge needed to run this contract, Hacker’s CEO offers a job to one of the managers from the Schools Board. The job will commence if Hacker wins the tender. If Hacker does not win the tender the job offer will not go ahead. The salary to be paid for this job is around double what the manager is currently earning. The manager does not tell the other panel managers from the Schools Board about his job offer.

Required: Discuss the ethical issues for Hacker and for the School’s Board manager who will get a new highly paid job if Hacker wins the tender.

Answer 1

A. 1. The method that can be used to assess the tenders is the net present value (NPV) method and the total outlay method. The two tenders involve different costs and so the NPV method will compare the present value of these costs (using the discount rate of 7% - which is the cost of capital). The method with the lower present value (as it is a cost and hence negative cash flow) will be selected. In case of total outlay method the tender with the lowest total outlay or costs will be selected.

I would recommend using the NPV method as it will help us in selecting that tender which has the lower costs in terms of present value. Total outlay method ignores the impact of discounting.

2.

	(A)		(B)	C = (A)*(B)
Year	Whatis costs	1+r	PVIF	PV
1	250,000.00	1.07	0.9346	233,644.86
2	250,000.00		0.8734	218,359.68
3	250,000.00		0.8163	204,074.47
			NPV	656,079.01
	(A)		(B)	C = (A)*(B)
Year	Hacker costs	1+r	PVIF	PV
1	350,000.00	1.07	0.9346	327,102.80
2	250,000.00		0.8734	218,359.68
3	150,000.00		0.8163	122,444.68
			NPV	667,907.17

From the above tables we can see that NPV is lower in case of Tender 1 i.e. the Whatis tender and so the Whatis tender or tender 1 should be selected.

Part b:

Hacker’s attempt to gain the special knowledge needed to run this contract by offering a job to one of the managers from the School’s Board is unethical and violates the principle of equity and fairness. Hacker is attempting to gain special knowledge with regards to the contract and hence gain an upper hand which will allow it to quote competitive rates for its tender. It is attempting to gain confidential information by offering a job to one of the managers from the Schools Board only for this purpose. Thus Hacker’s action is completely unethical and also be considered illegal as well.

The action of the School’s Board manager will also be unethical as the manager will be sharing confidential information with regards to the contract just to get rewarded with a job that pays twice the amount of current salary being drawn by the manager. The action of the manager is unethical and can also be considered illegal as well.