Performance Management
Group Members:
Prudence Maake 220155398
Muhammad Patel 221002175
Mahlatse Malele 201908049
Salphy Rametse 220049436
Wenzile Siyanda Pereira 221128425
Requirement 1:
Hamid’s use of internal rate of return (IRR) and the 10% hurdle rate used to
financially appraise the project. Issues included are:
1.1 Explanations of Internal Rate of Return and Hurdle Rate
Internal Rate of Return (IRR)
is a financial metric used to evaluate the profitability of an investment. It
represents the discount rate at which the net present value (NPV) of the
project’s cash flows equals zero. A higher IRR indicates a more profitable
investment.
In the FlattLuxe proposal, Hamid has an estimated of 16% internal rate of
return (IRR) for this project. This project is expected to be greater compared
to the cost of capital.
Hurdle Rate
also known as the required rate of return, is the minimum return that a project
must achieve to be considered acceptable. It is usually set based on the
company's cost of capital and investment risk.
Flatthall's hurdle rate is 10%, this is the standard that the IRR is measured
against to see if the project meets the company's financial needs.
EVALUATION OF HAMID’S PROPOSAL
1.2 Comparison of the Internal Rate of Return to Hurdle Rate.
The IRR of 16% is higher than the hurdle rate of 10%, indicating that the
project has the potential to provide returns that are much higher than the cost
of capital, making it a good investment.
2. Considerations and Identified issues
A. Risk Assessment:
The IRR fails to account for project risk above the predetermined hurdle rate.
The luxury category for student housing may result to new risks, such as
market demand fluctuations or economic downturns that affect students'
capacity to pay premium rents. Such risks should be assessed to guarantee
that the IRR is a reliable metric.
B. Overruns in expenses and uncertainty:
The proposal aims for a T$5 million investment each conversion. There is a
risk of cost overruns or unplanned charges, which could affect the IRR.
Sensitivity analysis should be carried out to determine how changes in
expenses or revenues affect the IRR.
C. Cash Flow assumptions:
The IRR calculation is dependent on the timing and volume of cash flows.
Ensure that the cash flow predictions used to calculate the IRR are
reasonable and based on thorough market research.
D. Market Demand and Pricing Strategy:
The proposal suggests that luxury units will command three times their
existing price. Market research should show that such a pricing plan is viable
and sustainable. If demand for luxury student housing is overstated, actual
returns may be lower than anticipated.
E. Financing and Funding:
Evaluating the effects of financing T$5 million per conversion. Financing costs
(interest rates and terms) may have an impact on actual returns and IRR
viability.
Requirement 2:
The challenges that will arise when identifying and quantifying
cash flows relating to the net present value (NPV) of Taisha’s
proposal, especially considering the potential for lease expiration
after 15 years.
1. The risks of unexpected expenses for the remodelling
The average remodelling cost is T$20 million which is about the expected cost
of remodelling each building. Since there is normal wear and tear depreciation
on buildings and each hospital is different, prices may be very different. It is
going to be hard to estimate the precise remodelling expenses due to:
Building Conditions: Each hospital may have its own building structural
constraints or building requirements.
Inflation and Market Fluctuations: Building costs like materials and the labour
could vary in time which can affect the overall expenditure
2. Revenue forecasts
Future rental income is subject to many uncertainties that must be quantified
where possible.
Demand Fluctuations: Even though the location is perfect, the demand
for accommodation may vary due to the economic climate, level of
student enrolment, or any other unforeseen reason.
Rental Rates: The ability to be able to charge an exorbitant price is
dependent on the level of competition among other housing facilities in
the market.
Occupancy Rates: Occupancy levels have been estimated over a time
frame of 15 years and although demand may improve in relation to
these estimates, the stability of the economic climate makes this a
difficult task.
3. Lease expiration and property reversion
At the conclusion of the 15-year lease, however, we must consider possible:
Reversion fees: In cases where we do not extend the renewed lease,
possible reversion fees for restoration or refurbishment of the area
might be insisted on.
Future worth of Properties: If further leasing of such premises shall not
be pursued, then the likely use of such properties in the forthcoming
future or their value in the market ought to be investigated.
4. Regulatory and Compliance issues
Compliance expenses: These allow for changes to be made to the
Hospital but in compliance with the existing laws which could change
with time and affect both the costs and the operations.
Permits and approvals: For remodelling it is often a long process to get
the right licenses.
5. Financial modelling difficulty
Cash Flow Projections: To make reasonable forecasts of cash flows
within a time frame of ten to 15 years, several conditions relating to the
economy in the future generally must be assumed and this may lead to
a lot of uncertainty.
Discount Rate: In calculating and evaluating NPV there is an emphasis
on determining the most reasonable discount rate and for this, it
depends a lot on the risk of the investment which could change
depending on risk environment.
These aspects further compound the problem of determining the financial viability of
this idea. A sensitivity analysis could be helpful in evaluating variations in the NPV
associated with changes in major assumptions.
Requirement 3:
Three key risks that could arise with the use of robots in place of
human concierge staff
1. Technical failures and system downtime
Risk: As robots are highly dependent on technology, there is a risk of
breakdowns or system downtimes. Attempting to operate the service robot
should be done with caution. If it does not work properly, it may affect guest
services, raise complaints and affect guest satisfaction
Regular Maintenance and Updates: Ensure that Robo-guard
provides regular maintenance and updates to avoid a lot of technical
issues. Introduce a more systematic approach towards software and
hardware updating by having a maintenance schedule.
Technical Support: Set the good provision for the technical support of
the Robo-guard so that they can get solutions quickly. There should be
a support line that is dedicated towards helping people and addressing
issues immediately.
Backup Systems: Provide for situations where the robot may fail to
trigger and recommend the use of a human concierge support system,
until the problem is diagnosed and corrected. This ensures that there is
no gap in service provision for the guests.
Without sympathy with robots, there will always be enough alternative
Override Components allowed especially for refining service robot retrieved
from the base without manual override such as waiters or concierge. This
ensures that the available needs of the clients are and will always be met at
the right time.
2. User acceptance and adaptation
Risk: Guests and students may struggle to adapt to interactions with robots
rather than human workers, resulting in discontent or opposition to the new
system.
Clear Communication: Guest and Student, assist the audience in
understanding the benefits of the proposed robot concierge system.
Explain how robots are going to enhance service provision.
Training and support: Offer appropriate training workshops or bring
along learning materials to tackle the issue of how to engage visitors
and students with the robots. Allow them to express complaints or seek
support in case of need in a hassle-free manner.
Gradual Transitions: Introduce the robots to the area gradually in
order to ease discomfort. To begin with, you might deploy a couple of
human concierges to assist in the transition and troubleshoot problems
that arise.
3. Security and privacy concern
Risk: Robots with cameras and access to personal information may cause
security and privacy concerns among guests and students, particularly when
managing sensitive data.
Robust Data Protection Policies: Ensure that Robo-guard follows
severe data protection and privacy guidelines. Implement clear policies
for personal data collection, storage, and use.
Transparency and consent: Clearly notify guests and students about
the types of data acquired by the robots and seek their consent as
needed. Give them the choice to opt out of non-essential data
collecting.
Regular audits: Conduct frequent audits of the robot system's data
handling and security procedures to guarantee compliance with privacy
laws and to identify any weaknesses.
Reference list
https://www.investopedia.com/terms/h/hurdlerate.asp#:~:text=
Error%20Code%3A%20100013)-
,What%20Is%20a%20Hurdle%20Rate%3F,like%20pursuing%20
a%20specific%20project.
https://corporatefinanceinstitute.com/resources/valuation/net-
present-value-npv/
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9998175/
