Assignment
University of Lusaka (Unilus), an established private university wishes to pursue corporate growth. It has identified Malawi as a potential market for private education provision. Unilus's management has carried out detailed market research into the Malawi market.
Its findings were as follows: The plan is to test the Malawi market for a period of three years. The total market for university education in Malawi is 4000 students per year, of which 20% are expected to use private (non-government) universities. Due to a lack of competition in the private university market Unilus estimates it could capture one quarter of the private market in its first year of operation.
It estimates that it could grow these numbers by 10% annually thereafter as a result of the quality of its tuition. The potential fee income for each student is estimated at K5,000 per annum in the first year of operation. It is planned to increase fees by 2% each year thereafter.
The University has agreed with the relevant Malawi and Zambian authorities that there will be no corporation tax payable in respect of the proposed venture.
In addition, in order to promote international competition within the sector, the Malawi Department of Education will pay a fixed grant to Unilus of K200,000 per annum starting in year 2. An ideal location for the university has been identified. The building will be leased for a three year period at a year 1 annual rental of K400,000. The lease allows for a 20% annual increase thereafter.
The annual overhead cost of running and maintaining the university will total K40,000 in the first year of operation. This cost is likely to increase by K10,000 each year thereafter. The teaching staff will be seconded from Lusaka for the initial three years. Six teaching staff will work in Malawi.
Average annual teaching salaries are presently K50,000. The college has agreed a 5% cumulative salary increase per annum. Each of the teaching staff will receive a year 1 travel and accommodation allowance of K10,000. The annual increase in this allowance will be inflation linked.
Each member of the teaching staff will receive an annual bonus equating to 30% of their basic salary in any year where gross college income from the Malawi market exceeds K1,100,000. These bonus payments are paid one year in arrears. A local interpreter will be employed at an annual cost of K20,000 per annum, fixed for the three year term. Inflation is expected to run at 10% per annum.
REQUIRED
(a) Prepare a report for the Board of Unilus which assesses the Net Present Value (NPV) of the Malawi proposal, using a discount rate of 7%.
(b) Consider four non-financial factors to be considered when making the decision whether or not to enter the Malawi market.