Question

Increasing Student Enrollment Proposal Case The chancellor of a local private university is looking for ways to increase enrollment at his University and circulated a request for a proposal to that effect. In response, the vice president of admissions submitted the following summary proposal. She wishes to enter into a memorandum of understanding with four Universities in the United Kingdom as part of an exchange program. She promises that their earned credits from their Universities will count towards graduation at her University. The University will guarantee their graduation on time if they take and successfully pass courses being offered in her university's various programs. She proposes that the action will earn the university minimum of five hundred thousand ($500,000.00) dollars per year for the next (3) three years, a fifty (50%) percent return. However, the university must invest 1,000,000.00 pounds starlings initially, which it does not have at hand. The exchange rate is .89 per $1.00. The accounting department of the university believes that the $500,000.00 annual revenue is possible. The finance department analysis indicates that the university can raise the needed one million (+#1,000,000.00) pounds one-time investment at a cost of 12 percent annual rate based on the university's credit rating.

1. Base on your understanding of time value of money, should the Board of Directors of the University approve this proposal (support your decision with computations)?

2. What is the actual return on this proposal (show your computations)?

3. Add any other explanation to support your conclusion with facts using what you learned from this course and any other alternative methods.

Answer 1

We will have to evaluate the proposal in dollar terms

Initial investment = 1000000 pounds

1000000 pounds = 1000000 / 0.89 Dollars

Initial Investment = 1123595.50 dollars

1. Now we will calculate present value of three year cash flows

Year	Cash Flow	PV @ 12%
1	500000	446428.5714
2	500000	398596.9388
3	500000	355890.1239
	Total	1200915.634

Present Value of three year cash flows = 1,200,915

NPV = 1,200,915 - 1123595.50 = 77320

Yes, the BOD should approve the decision

To calculate the annual return on this proposal we will have to calculate IRR.

Year	Cash Flow
0	-1123596
1	500000
2	500000
3	500000

Using Formulae

=IRR(B2:B5)

IRR = 15.96%

3. For a project to be accepted one of the three condition must be satisfied

a) NPV should be positive

b) IRR should be more than cost of capital

Since IRR of 15.96 is greater than cost of capital of 12%

BOD should approve the project