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SOLUTION TO SOUTH AFRICAN
(Topics covered include: budgeting; control; operating environment; value chain concept; operating
leverage and cost-volume-profit-analysis)
Author: David Rosenberg, Associate Professor in Accounting, Rhodes University, South Africa.
QUESTIONS FOR DISCUSSION
1 What are the major strategic challenges and risks facing the university going forward? Be sure to
make your answer as comprehensive as possible.
2 Using value-chain analysis, identify areas where the university can improve its operations. Keep in
mind the changing environment in higher education within South Africa.
3 What impact do you think the internet will have on the way universities generally present their
courses in the future?
SOLUTIONS TO DISCUSSION QUESTIONS
During the past two decades many organizations including universities have faced dramatic changes in
the environment in which they operate. In the context of South Africa there is increasing competition for
quality students which is being exacerbated by the arrival in the country of overseas universities, the rapid
development of new IT technology and communication systems which has increased the reach of
competitors both foreign and local – also price competition has begun to manifest itself for the first time.
To compete successfully in today’s competitive environment universities will have to make student
satisfaction an overriding priority and the courses and programmes offered by universities will have to be
responsive to the skills required by the market place – offering degrees and diplomas which simply
educate students without giving them the requisite skills to compete for positions in a highly competitive
job market would seem to be an exercise in futility.
Some of the strategic challenges facing Excelsior University at this juncture can be summarised as
• The schooling system in South Africa is poor and declining and the credibility of the school leaving
certificate is questionable – although there is a surfeit of students applying to universities only a
small fraction of them have mathematics as a subject and many of those only have modest passes in
this subject. The upshot of all of this is that competition is growing for quality science, commerce
and law students for example.
• Given that there are reportedly 600 000 unemployed graduates in the country almost all of them
graduates in the humanities, Excelsior, with 50% of its student body being in humanities, would
need to drastically change the composition of its student body since it is producing graduates who
are highly likely to simply join the ranks of the unemployed – needless to say this is a waste of scarce
resources particularly since the government contributes about 60% percent of the tuition costs of
students in South Africa.
• As Excelsior is one of the most expensive universities in the country and competition for quality
students is increasing very close attention will have to be given to the cost structure of the university
so that fees are reduced, not increased in the future or at least fee increases are severely curtailed –
two worrying statistics are that the university has the lowest student to staff ratio in the country
while the fact that the cost of administrative staff at the university is equal to the cost of academic
staff raises questions as to whether the university is not overstaffed as regards both academic and
• The advent of the internet together with advanced communication and delivery systems (the I-Pad)
gives universities generally the ability to offer courses on a distance basis – this has forever changed
the competitive environment – from Excelsior’s standpoint these changes are even more relevant
since it is situated in a rural area and is almost completely dependent on residential students – see 3
below where the impact of the internet and technology is discussed in more detail.
• The university should give consideration to semesterising a number of its courses so that new
students are able to commence their studies either at the beginning of the year or mid-year – this
might attract a few more quality students and given that each additional student recruited gives rise
to an additional contribution of about R76 000 (the university has a contribution ratio of about
97%) every additional student recruited is financially very important to the university – the
university does not offer bursaries and it has unutilised facilities so it seems logical that it should
offer bursaries to high quality students to induce them to attend the university since the marginal
cost of one additional student is only R1 500 and the government contributes about R48 000 per
annum to the cost of educating a student.
The problem with universities is that for a very long time they have been insulated from competition
and have been operating in a cocoon with no real incentive to change their modus operandi – universities
have been led largely by academics with limited financial skills and little or no management training.
Given rapid changes in the environment and the fact that the budgets of some large universities run into
several billion Rands the governing bodies of universities might have to re-think what sort of person they
want to lead their universities into the future.
2 CHAPTER 1 SOLUTION TO SOUTH AFRICAN CASE STUDY EXCELSIOR UNIVERSITY
SOUTH AFRICAN CASE STUDY
IN SOUTH AFRICA
APPRAISAL AND RISK)
1 Considering the range of investment appraisal techniques, what problems might
telecommunications companies such as MTN South Africa face in using these to make investment
Definitions – a quick reminder
• Opportunity cost is the minimum rate of return the business requires, usually equated to the
rate it would receive if it didn’t invest in the project.
• Return on investment is the return received on capital invested in a business.
• Discounted cash flow is a way of calculating a present value for money received in the future.
The ‘discounting’ takes account of the fact that the money would have earned interest if
received now and can take account of inflation.
• Time value of money is the concept that money received now is worth more than the same
amount of money received in the future.
• Net present value is the present/current value of all future cash income and outgoings for a
project. Where the net present value is positive, this means the rate of return is greater than the
minimum required rate of return.
• Internal Rate of Return (sometimes called the discounted rate of return) is the discount rate that
brings the net present value of a project to zero. It reflects the true cost of capital for a project. It
can be compared with the minimum required rate of return to check whether a project is
• Accounting Rate of Return (or return on investment/return on capital employed) calculates the
average net profit as a percentage of the capital invested – to show the percentage return per year.
• Payback – the payback period of a project is the time that is required for the cash proceeds from
a project to pay back the original capital investment.
Businesses need to be aware of the issues with investment appraisal. A project with a short
payback time may have a negative Net Present Value (NPV), for example, so which method
should be used?
Businesses also need to consider the rate of change of technology, which might mean that a
simpler payback period method of investment appraisal might be more suitable. It is important to
ensure that the investment is paid back before the technology is out of date.
Financial investment techniques used alone don’t look at qualitative issues of the investment but
simply at the financial view. In a fast-moving, competitive market, businesses may have no choice
but to invest in new technology to remain in the market.
Future cash flows from new technologies may be uncertain – there is no equivalent project or
past experience on which to base predictions. The adoption of new technologies by consumers is
Capital investment can be high and may be irreversible – once a provider has chosen a particular
technology it may be difficult to change and if there are a number of different technologies to
achieve the same result (e.g. HD and Blu-ray video technology) it may not be known which will
become dominant in the marketplace at the point of investment.
Dependence on other parts of the sector for some equipment, technology, applications mean that
costs of investment and returns can be affected by competition amongst providers for access to
In addition, there are the general problems/limitations with the different methods:
Limitations of payback:
• May oversimplify the investment
• Does not consider that future returns are worth less in today’s terms
• Ignores qualitative aspects of the decision
• Focuses just on the payback period and ignores cash flows outside the payback period
• No comparison of net revenues (profits) with initial investment to calculate return
• Ignores inflation and interest rates
Limitations of accounting rate of return:
• Ignores the time value of money
• Ignores qualitative aspects of the decision
• Ignores time to recover initial investment
• Ignores costs of finance that may be needed
Limitations of discounted cash flows/net present values/IRR:
• Ignores qualitative aspects of the decision
• Internal rate of return is difficult for non-conventional cash flows, e.g. those where there are
further negative cash flows after the initial investment – there will be more than one IRR.
2 How might MTN take account of risk in their investment decision making?
They may use risk-adjusted discount rates to assess the potential returns on riskier projects.
Weighted average cost of capital can be used to assess projects with risk equivalent to the firm’s
existing level of risk.
Sensitivity analysis can be used to see how sensitive the net present value is in relation to the
elements used to calculate it, e.g. if the interest rate goes up or down or cash flows change.