(a)

Corporate appraisal can be defined as “a critical assessment of the strengths and weaknesses, opportunities and threats (SWOT analysis) in relation to the internal and environmental factors affecting an entity in order to establish its condition prior to the preparation of the long-term plan”. (CIMA Official Terminology). The definition places SWOT analysis firmly at the center of the corporate review process.

Corporate review and appraisal are a critical part of an organization’s long-term planning. It bridges the gap between identifying objectives and establishing strategy. It forms a part of the long-term planning process, alongside environmental analysis and gap analysis and forms part of the stage in which feasible options are identified.

By focusing attention on broad strategic issues, SWOT analysis compels managers to stand back from the detailed operational problems in which they can become immersed. Both internal and environmental change can be rapid and failure to address the need for matching organizational changes can lead to stagnation and decline. SWOT analysis provides a stimulus and a framework for broader planning issues.                                                                                                                                                                                                                                                                                                                                                                                                                     (b)

The current charging system is extremely simple. Tech Trend simply takes its total annual costs (budgeted costs presumably) and divides by the number of electronic devices in use. This produces an annual charge per device which apparently does not reflect the characteristics of each individual device: price, complexity, likelihood of failure, estimated life, maintenance costs, or set-up costs. It does, however, meet the financial objective imposed on Tech Trend of recovering its total costs.

Alternatives to this charging basis are discussed below:

Instead of invoicing users, Tech Trend could invoice the parent company, Nexus Com. In effect, Tech Trend would become a department of Nexus Com. A problem with this approach is that it is difficult to exercise control either over the efficiency within the Tech Trend department (there is little incentive to achieve efficiencies if head office is meeting all the costs) or over the use of Tech Trend by user divisions. Users are not allowed to resort to other suppliers, which means that market checks are absent.

Tech Trend could differentiate between the different categories of device and make a different charge for each category. This does not overcome the major weakness of the current system – the absence of market forces – but would at least mean that glaring inefficiencies might come to light if Tech Trend’s charges were clearly out of line with market prices.

Market-based prices are another possibility. This would mean a drastic change compared with the present situation, because it would mean that Tech Trend became a profit Centre (or even an investment Centre). Many researchers argue that the introduction of market incentives can help to improve efficiency by stimulating effort. To get the full benefit of this boost it would be necessary to allow managers the option of purchasing from suppliers other than Tech Trend. A half-way house would be to insist that managers continue to use Tech Trend, but pay prices based on those offered by outside suppliers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       (c)

The financial case for selling Tech Trend

Tech Trend currently incurs costs of $90 million per annum for the supply and maintenance of 60,000 devices. This equates to an average annual cost of $1,500 per device, compared with estimated annual charge of $1,000 per year if an external purchaser provides the same service. The potential saving to Nexus Com is $30 million per year. In addition, Nexus Com would receive a capital injection at the time of the sale.

It is not clear from the question whether all the projected cost savings would actually materialize. If any part of Tech Trends annual costs represents apportioned fixed costs which would not disappear on a disposal, then the analysis above would be weakened. But on the face of it, the financial reasons for selling Tech Trend are compelling.

The strategic case for selling Tech Trend

Advantages of selling Tech Trend:

• Greater flexibility of “outsourcing” arrangements – as the needs of Nexus Com change in the future it may be inconvenient to have a large investment in Tech Trend.
• New ideas provided by fresh management may provide a stimulus to innovation and increased efficiency.
• Tie-in terms mean that Nexus Com will still have guaranteed access to services currently provided by Tech Trend.

Disadvantages of selling Tech Trend:

• Reduction in, or disappearance of, management control over Tech Trend.
• Loss of the expertise which the corporate review identified as a strength of Tech Trend.
• Despite tie-in-terms, there will inevitably be some uncertainty over the availability of services once they are contracted out.
• There is possibly an issue of confidentiality, though Nexus Com will attempt to cover this point in the terms of sale.                                                                                                                                                                                                                                               (d)

  Determine the viability of the project using NPV technique

  Capital Allowance Computation

  Year of Claim	Details	Capital (ASH₵’000)	Tax (ASH₵’000)
  1	25% of ASH₵200	50
  2	25% of (ASH₵200 – 50)	37.50
  3	25% of (ASH₵200 – 50 – 37.50)	28.13
  4	25% of (ASH₵200 – 50 – 37.50 – 28.13)	21.09
  5	(ASH₵200 – 50 – 37.50 – 28.13 – 21.09)	63.28

  Alternative method for computing NPV
  METHOD 2

  Year	0	1	2	3	4	5	6
  	ASH₵’000	ASH₵’000	ASH₵’000	ASH₵’000	ASH₵’000	ASH₵’000	ASH₵’000
  Gross Fees		250	300	350	350	300
  Direct cost and other costs		(155)	(185)	(215)	(215)	(195)
  Capital Allowance		(50)	(37.50)	(28.13)	(21.09)	(63.28)
  Taxable profit (a)		45	77.50	106.87	113.91	41.72
  Tax @ 25% (b)			(11.25)	(19.38)	(26.72)	(28.48)	(10.43)
  Add capital allowance (c)		50	37.50	28.13	21.09	63.28
  Capital investment (d)	(200)
  Investment in working capital (e)	(20)	(5)	(5)	(5)		90
  Net Cash Flow (a+b+c+d+e)	(220.00)	90.00	98.75	110.63	108.28	166.52	(10.43)
  Discount Factor @ 24%	1.0000	0.8065	0.6504	0.5245	0.4230	0.3411	0.2751
  Present Value	(220.00)	72.59	64.23	58.03	45.80	56.80	(2.87)
  Net Present Value	74.58

  The NPV of the project is positive at ASH₵74.58 million, indicating that the project is financially viable. The Board of Directors of Prime Connect Solutions Ltd should proceed with the investment, as it is expected to generate a positive return above the after-tax weighted average cost of capital of 24%.

  (e)

  Strategies which the Board of Directors could implement to give PrimeConnect Solutions Ltd a competitive edge

  • Opening more sales points or outlets.
  • Giving promotional items to customers.
  • Operate with all the available mobile operators.
  • Embark on advertisements and publicity.