Waste Management in Ghana
Ghana has been battling with domestic and industrial waste for many years and successive governments made it one of the topmost priorities to address the menace. However, all the well-intended measures adopted in the past have not yielded significant result in addressing the waste menace. The current government which assumed office in January 2017 created a new ministry, Ministry of Sanitation and Water Resources, in a bid to give new impetus to the waste management agenda. Two years on, the general public verdict is that much has not changed as heaps of waste can be seen in every nook and cranny of the major cities in the country. The President has the vision to make Accra, the nation’s capital city, the cleanest within the sub-region but the vision is deemed to be far from realisation. It is estimated that Ghana generates 1.7 million tonnes of waste per year and Accra alone generates 3000 tonnes of waste per day.
It also appears that the state has lost the battle on the desecration of the country’s major beaches with litter and open defecation in abundance. The other national monuments such as colonial forts and castles along the coastal belts have not been spared. These areas are major tourist attraction centers and the negative financial consequences cannot be overemphasized. A popular river, River Odorna, which runs through the national capital has been silted with plastic and organic waste, displacing the water which runs through it and terminate in South Atlantic Ocean. The nation has not recovered from the twin disaster of flood and fire which claimed over 100 lives when River Odorna was overflooded. This resulted in nearby petrol filling station being flooded and with oil displaced fire from unknown source that triggered massive fire killing all the people who had taken refuge there.
The current national policy on waste management is based on decentralisation to the various Metropolitan, Municipal and District Assemblies (MMDAs) who are the sub-national organs responsible for administration of various urban, peri-urban and towns in the country. The MMDAs manage waste within their jurisdiction by signing contracts with various privately-owned waste management companies and to some limited extent MMDAs-owned trucks which has proven to be less effective with frequent break downs of those trucks. The waste so collected is disposed at various landfill sites constructed by the MMDAs but most of those sites are now full and are turning into mountains of waste. The hosting communities of landfill sites are up in arms for their closure as health and environmental negative impact takes a heavy toll on the residents. There is currently pending a plethora of law suits by affected residents to get the courts to force MMDAs to shut down the landfill sites.
The citizens engage in indiscriminate disposal of waste everywhere in the country. The culverts, drainage systems and streets are suffocating under the pressure of waste especially that of plastic. Rubbish are thrown onto the streets from moving commercial and private vehicles alike. At various lorry stations where dustbins are provided, drivers’ mates dispose waste to the floor where cars are parked. Citizens build up wastes in front of their houses day time and by the following morning those waste have vanished. It has been established that a number of residents are beginning to dispose waste into gutters and shoulders of major roads at night. Although, all MMDAs have punitive fines and sanctions in their bye-laws nobody seems to suffer any consequences engaging in littering.
Waste Management Sector
The waste management sector has a number of actors including a few large companies with large concessions and a lot of trucks for waste collection and disposal, MMDAs with their internal waste collection units, small companies with few trucks and hence limited concessions, and recently individuals with tricycles, without concessions, have emerged to cater for unserved new residential areas springing up at the outskirts of the cities. The large companies have a fleet of garbage trucks with capacity to collect huge tonnes of waste within their concession areas. Thus, the large companies are better resourced and able to do mass collection of waste. Many small companies with few garbage trucks are actively involved in waste management effort and are generally granted concession over smaller areas. Despite the collective effort by large and small companies as well as MMDAs, large amount of waste remains uncollected and in fact the amount of waste generated is on the rise. This situation has led to individuals using tricycles to collect waste from households for a fee.
The waste management companies get paid in two ways – directly by households and companies that have been provided waste bins and containers and indirectly by MMDAs for the picking of waste containers provided at vantage points for use by market centres, lorry stations and households that may not subscribe to direct service. Payments to waste companies are persistently in several months of arears with serious implications on their financial positions. This situation has resulted in irregular collection of pool waste containers with attendant consequence of mounting waste in urban centres.
The Group and Company
One of the major large companies operating in the waste sector is Waste Tiger Ltd and is part of Omega Group Ltd (OGL) of Companies. The other subsidiaries under OGL include Sewerage Systems and Medical Waste Treatment Ltd, GCD Diamond Ltd, JB Plant Pool Ltd, ACB Bank Ltd and Recycling & Compost Plant. A brief description of the business of each of the subsidiaries follows:
Waste Tiger Ltd (WTL) – is involved in collection of solid domestic and commercial waste in various MMDAs across the country.
Sewerage Systems and Medical Waste Treatment Ltd (SSMWT) – handle liquid and medical related waste across the major cities.
GCD Diamond Ltd (GDL) – a mining company involved in extraction and processing of raw diamond which was added to the group 4 years ago.
JB Plant Pool Ltd (JPPL) – leading supplier of heavy duty and earth moving plant and equipment, buses and renders total service support for all products sold in case of faults or breakdowns.
ACB Bank Ltd (ABL) – is an indigenous financial institution providing retail, corporate and treasury services to diverse clients.
Recycling & Compost Plant (RCP) Ltd – is involve in recycling of waste, export of waste and production of fertilizer for local market.

The Group CEO, Mr. Joseph Quainoo is not enthused at the rising cost of the group and its subsidiaries due to duplication of functional areas within each subsidiary. He wants to reconfigure the existing organisational structure in which there will be dual line of reporting and responsibilities. The CEO wants a structure that combines functional specialisms (marketing, finance, Human resource and Information technology) and the subsidiaries and by so doing eliminates subsidiary-specific functional areas. Again, the structure should result in keeping subsidiaries largely independent but with necessary intervention with respect to functional activities.

The Group CEO wants to do performance analysis of the various subsidiaries based on the extent of cash generated and used by respective subsidiaries. The group Chief Finance Officer (CFO) was tasked and has generated a summary of cash inflows and cash outflows for each subsidiary. The cash flow information is summarised in Exhibit 1 below:
Exhibit 1

The Group CEO wants a portfolio matrix constructed to analyse the various subsidiaries and advice on strategic option to pursue for each subsidiary so as to inform resource allocation within the group.
Recycling & Compost Plant (RCP) Ltd
RCP Ltd is the latest subsidiary incorporated and commenced business/operations in January 2018. The idea to start RCP Ltd followed from a waste management conference Mr. Joseph Quainoo attended in China and his encounter with the CEO, Chun Juan, of the largest waste management company in China. At the said private meeting Chun shared the idea of how lucrative recycling of waste is becoming, the fact that China is importing waste and how fertilizer is being produced from waste. Armed with this information and the absence of waste recycling in Ghana, Mr. Quainoo decided to venture into that segment of waste management.
RCP Ltd has three major lines of business – production of organic fertilizer from organic waste, plastic from plastic waste to be sold to plastic processing companies and finally process some organic and plastic waste for export to China. The establishment of RCP Ltd is the first significant intervention to change traditional use of landfill sites in waste management to waste recycling which is more sustainable and also generate economic activities. Although, various governments have always proposed to set up a recycling plant but that never materialised. Perhaps, the inertia and apparent lack of commitment by governments to build recycling plant is because it is capital intensive. The company has a combined permanent and contract workforce of 570 and as business picks up, more hands would be engaged. Kindly refer to exhibit 2 for the data that was used in performing investment appraisal. The current capacity of the company only allows it to process 30% of total waste generated in the capital city. The vision of Mr. Quainoo to is to expand to all the major cities in the country.
Exhibit 2
The plant and equipment and all related cost necessary to make it operational has been pegged at GH¢1,500,000. This recycling plant has an expected life of five years, after which it would have to be replaced and will have no residual value at the end of this period. The plant can produce and process a maximum of 75,000 tonnes of waste per year over five years. The revenue per processed ton is GH¢110. To ensure that the maximum output is achieved, the company will spend GH¢250,000 a year in maintaining the plant over the next five years.
Based on the maximum output of 75,000 tonnes per year, the following expected costs per ton excluding the maintenance costs above are: waste and treatment material GH¢32.5, labour GH¢27.5 and overhead cost GH¢42.5. The following information is also relevant:
The waste and treatment materials figure above include a charge of GH¢10 for treatment (chemicals) materials that is currently being stocked by one of the subsidiaries in the group and can be used for waste treatment. Each ton of waste requires 1,000 liters of the chemicals and the charge is based on the original cost of GH¢5 per 500 liters for the chemicals. It is a material that is currently used in one of the other subsidiary and the cost of replacing the chemical is GH¢7.50 per 500 liters. The chemical could easily be sold at a price of GH¢6.25 per 500 liters.
The labour cost relate to payments made to employees that are directly involved in recycling the waste materials. The labour cost include some employees who have no work at present and if there were no production, they will be made redundant immediately at a cost of GH¢1,150,000. However, if production takes place, the employees are likely to find another work at the end of the five-year period and so no redundancy costs will be incurred.The overhead cost includes a depreciation charge for the new machinery and equipment. The policy of the business is to depreciate non-current assets in equal instalments over their expected life. All other overheads included in the above figure are incurred in recycling.

The company uses a cost of capital of 20% to assess projects. The management of the company is interested in determining the net present value of the recycling plant and equipment at the end of the five-year period.

Required:
Assess the legal, economic and social factors in the environment of the waste management sector in Ghana.                                               (6 marks)

SHOCKS IN THE GHANAIAN BANKING INDUSTRY
Introduction
The news on August 14, 2017 to the effect that the licenses of two indigenous banks – UT Bank and Capital Bank have been revoked came as a surprise to the Ghanaian business community, since the two banks had won numerous awards for performing well in the industry. The two banks were taken over by GCB Bank Ltd. In the 2011 Ghana Banking Awards, UT Bank was adjudged the Bank of the year. Capital Bank was also adjudged the Best Growing Bank, and Best Bank in Deposits & Savings in 2016. A press statement issued by Bank of Ghana (BoG) read in part as follows: “The Bank of Ghana has revoked the Licences of UT Bank Ltd and Capital Bank Ltd. This action has become necessary due to severe impairment of their capital. The two banks have high non-performing loans. UT Bank and Capital Bank were deeply insolvent, meaning that their liabilities exceeded their assets, putting them in a position not to be able to meet their obligations as and when they fell due”. This revocation was in line with Section 123 of the Banks and Specialised Deposit Taking Institutions (SDIs) Act 2016 (Act 930). The Act states that “when a bank is in distress, the Bank of Ghana revokes its license, possesses the bank, appoints a receiver and then put it up for sale”. In this case, GCB Bank Ltd acquired the banks, while Bank of Ghana appointed PricewaterhouseCoopers (PWC) as the receiver.
To avoid a run on other banks and to minimise instability in the financial sector, all deposits and selected assets of the two Banks were transferred to GCB Bank Ltd, thereby assuring the depositors of their funds. The combined deposits of the two banks were estimated to be over GH¢2 billion, which far exceeds available liquid assets
As at the close of February 28, 2018, GCB Bank Ltd had successfully completed the full integration of the systems of the erstwhile UT Bank and Capital Bank by retaining 22 out of the 53 branches based on their location and accessibility to customers as well as absorption of more than half of permanent staff of those Banks. The acquisition of the two failed Banks by GCB Bank has increased its branch network across the country to 183.
The Ghanaian Banking Industry
The number of banks operating in Ghana had increased from 25 in 2010 to 34 as at the close of 2017. To outwit increasing competition in the industry, a wide array of products and services are being offered by the banks in order to attract customers. The accounts opening process has been simplified across the industry and makes it easier to open account with any bank. The non-banking financial institutions are offering higher returns/yields on deposits compared to that of the banks making deposit mobilization in the industry more difficult and expensive. However, the rates offered by the commercial banks on loans are, generally much lower than that available in the non-banking financial services segment. The major risk facing the industry is the quality of assets (loans), as reflected in high Non-Performing Loans (NPL) ratio, which edged up from 17.3% to 22.7% in December 2016 and 2017 respectively. In response to worsening NPL ratio, banks are tightening credit risk stance by cutting back on loans and advances portfolio and redirecting the funds to the money market and government securities even though the rates on those securities have been trending downward from 2017.
Another significant change in the industry is the switch from IAS 39 to IFRS 9 Financial Instrument – recognition and measurement effective January 1, 2018. The new standard changes measurement of impairment from historical credit loss to expected credit loss model, which recognises life-time expected credit loss based on forward looking information. This is anticipated to result in higher provision for loan losses and further impairment of the capital of banks.
Extract of selected Financial Soundness Indicators of the Ghanaian Banking Industry for the year end 2014 was as follows:
                                                                                              %
Net interest income growth                                            12.7
Cost to income ratio                                                         56
Asset utilization ratio                                                        8.8
Return on Equity                                                                30.8
Profit after tax growth                                                      66.5
The rise and fall of UT Bank and Capital Bank
The two defunct banks started as non-banking financial institutions and, subsequently, acquired banking license. They entered the banking landscape with legacies of expensive funds and huge NPL, making them less competitive. Since the collapse of the two banks, the media space has been agog with discussions by financial experts on the reasons for the failure of the two banks. Questions have been asked of the regulatory and supervisory role of the Bank of Ghana, since the failure was not an event, but a failure of processes over time. The integrity of the clean audit opinions issued by the external auditors on the two banks over the years have been questioned. At the time of the collapse in 2017, the two defunct banks had for the previous year not published their financial statements.
Below is extracts of the financial statements of one of the defunct banks.

Regulator’s action
Some recent measures by the Bank of Ghana to address vulnerabilities in the financial sector include: increase of minimum capital from GH¢120 million to GH¢400 million effective December 31, 2018 and a temporary freeze on issuance of new licenses in 2018. In July 2016, the Banks and Specialised Deposit-Taking Institutions Act, 2016 (Act 930) was passed by Parliament to tighten regulation of the banks. The Act limits the powers of Bank of Ghana in granting waivers to the banks, especially single obligor, which limits the risk of exposure to a single customer. Again, the Act imposes heavier sanctions for regulatory breaches.
To improve the quality of risk management, corporate governance and internal control practices in the banks, Bank of Ghana has issued directive to the banks to implement Basel II/III Capital Framework effective June 30, 2018. This imposes stringent requirements for capital measurement.
Addressing the annual dinner of the Chartered Institute of Bankers (Ghana) on December 2, 2017, the Governor of the Bank of Ghana made some remarks about the failure of the two defunct banks. Exhibit 1 below contains portions of the said speech.
Exhibit 1
“Despite the improved regulatory environment and supervisory frameworks, we have witnessed the dissolution of two banks this year. While no systemic challenges to the financial sector arose from the dissolution, it is useful to understand the underlying factors and reposition the sector to avoid the same mistakes in the years ahead.
Let me be upfront and say that though the failure of the two banks was due to significant capital deficiencies, the underlying reason was poor corporate governance practices within these institutions. In this instance, we saw the dominant role of shareholders who exerted undue influence on management of the banks, leading to poor lending practices. This was also reinforced by weak risk management systems and poor oversight responsibility by the boards of directors. Some of the examples of recklessness that led to the failure of the two banks include:

Co-mingling of the banks’ activities with their related holding companies. For instance, one bank was paying royalties for the brand name, even at a time that the bank’s financial performance was abysmal and could not pay dividends. Interestingly, the royalties were approved by four (4) out of seven (7) members of the Board without the consent of the other significant minority shareholders including an International Financial Institution. As a result, the international institution placed a notice on its website abrogating all relationships with the Bank and this led to most of the foreign lenders cutting off their credit lines to the Bank and recalling their credits thereby creating serious liquidity squeeze to the bank.

Also, very high executive compensation schemes were being operated by the affected banks which were not commensurate with their operations. The risk and earnings profile of the banks could not support the compensation schemes.
Non-Executive Directors of the banks compromised their independence and fiduciary duties to serve as checks on Executive Directors. This was because rewards such as business class air tickets were being granted to them annually.
Interference by Non-Executive Directors in the day-to-day administration of the banks weakened the management oversight function of executive directors. Some non-Executive Directors were also acting as consultants to the same banks with no clear mandate, which gave rise to conflict of interest situations.

Non-adherence to credit management principles and procedures as the banks were heavily exposed to insiders and related parties. There was also no evidence of interest payments on these investments. The investments were therefore impaired, but some members of the Board at the time accepted the responsibility to pay off the said amount through a board resolution.

Diversion of funds to holding companies and their related parties was widespread. In the case of one Bank, placements could not be traced to the bank’s records though some customers showed proof of their investments with the Bank. Irregular board meeting also accounted for the weaknesses in the board oversight.

In all of these cases, one thing was clear, and that is, the banks could not delineate themselves from their past practices as finance houses. They followed the same practice of borrowing from high net worth persons at a very high costs without any plans to bring themselves in line with the industry norm”
Required:
Assess the social, legal and economic environment of the Ghanaian banking industry.                                               (9 marks)

Technology is one of the most powerful forces within the external business environment that has changed significantly how business is conducted especially within the 21st Century. For instance, information technology (IT), well exploited, can have significant impact on all the five forces of competition.
Required:
Identify FOUR effects of technological change on organisation.                                                                                      (4 marks)

MOBILE MONEY SERVICE
Introduction
The government of Ghana has been concerned with low savings culture, low financial inclusion as well as high cash-based transactions in the country. In the year 2005, the government decided to pursue policies to grow the financial services industry (FSI) since it was indispensable to the accelerated economic growth required to make the country middle income country. The key service providers include banks, non-bank institutions, and mobile network operators (MNOs). By the close of 2017, 52% of the population would remained excluded from any form of financial services

There is generally high cost of credit in the country as the banks complain of difficulty in mobilizing deposits. Ghana is said to have one of the highest lending rates to the world, placing second in the latest ranking released by Trading Economics, a development which has been identified as a disincentive for the business community. The government budget deficit as a percentage of Domestic Product (GDP) decreased from 8.7% in 2010 to 8.5% in 2016 respectively. In the past, the government relied on external capital markets to fund the budget deficits but, following the worsening deficit figures, international financial organisations have raised concerns about the need for the government to ensure fiscal discipline.
The major development that revolutionized the FSI was the launch of mobile money solution in 2009 by the four MNOs. Mobile money rides on the backbone of the mobile telephony infrastructure of the mobile networks operators. This allows mobile money to be operated from wherever there is network coverage. It is estimated that there is 65% mobile network coverage in Ghana.
The MNOs deliver mobile financial services largely through thousands of registered mobile money agents throughout the country. This effectively makes agents closer to the customers than traditional banks and non-bank financial institutions. Most of the traditional banks’ branch networks are concentrated in the urban centres to the exclusion of peri-urban and rural communities. The combination of these two factors enables mobile money services to be administered quickly and efficiently, and in the most remote areas. The capital requirement for registration as mobile money agent is GH¢4,000 and the daily transaction limit is currently at GH¢5,000. On the average, agents operate one network mobile money, while very few agents have signed up to two or more different mobile money solutions. The total number of agents have increased from about 17,467 in 2013 to 93,376 as at close of 2016, and National Communication Authority (NCA) has projected rapid annual growth for the next three years (2017-2019).
The Environment
Mobile money started in the country largely with two products – airtime purchases and domestic remittances for small amounts. With the passage of time, mobile money service offerings have expanded to include bill payments, Point of Sales (POS) payments, fund transfers in increasingly larger amounts, and deposit collection by banks and non-bank financial institutions. The
expansion of the product offerings from mobile money makes it more appealing to a broad spectrum of mobile subscribers in the country. Customers are, therefore, keeping larger amounts in their wallets than they used to, and are using the expanding offerings from mobile money at the expense of existing products from the banks. There is growing mobile phone penetration rate as increasing number of mobile phone users are subscribing to more than one mobile network.
Furthermore, mobile money has become very popular among middle and lower income earners who make up about 80% of the population. The operation of mobile money on the handset is very easy and convenient and can be done from the comfort of one’s location. All that prospective mobile money customers require are a registered SIM card on the network of choice and a valid national ID. With these they can be set up and ready to use their mobile wallets within minutes. The processes for setting up and using bank accounts are however more complex due to stricter Know Your Customer (KYC) requirement by the Central Bank. Remittances through mobile money is instant at a fee of 1% of amount remitted or received. Mobile money transactions in Ghana reached GH¢679.17 million by the end of June 2016, according to the Bank of Ghana’s Payment Systems Department and it is expected to hit GH¢35 billion by the close of 2017. Until very recently, the income from mobile money was not taxed but the Minister of Finance in his 2017 mid-year review hinted of plans to impose a tax on the fees from mobile money operations.
The mobile money operations face the issue of network instability and system downtime as mobile network operators have not correspondingly expanded their infrastructure to match the growing subscribers. Sometimes, the agents are unable to meet cash demands of the customers due to mismatch in net remittances. This is more pervasive in the rural communities. Due to the weaknesses inherent in the issuance of valid Identity Cards (IDs), there are many fake ID cards and this has resulted in fraudsters having a field day. Some agents and customers have lost sums of money to fraudsters.
The customers and other players in the FSI have expressed concerns about their inability to carry out mobile money services across the various networks. Accordingly, the Central Bank has tasked its Payment Systems Department to ensure interoperability of mobile money across all networks in the country by June 2018. The government believes that mobile interoperability will deepen financial inclusion.
Regulation
Mobile money services it has operated without any regulatory framework. The industry players, according to a recent survey, suggested that the long-term survival of the mobile money service require stringent regulation. The Central Bank has now published guidelines for mobile money operators to be licensed as Dedicated Electronic Money Issuers (DEMI). The provisions include stringent KYC on the agents before registration, monthly returns on the activities of the agents, prosecution of the agents for mobile money fraud, etc. The mobile network operators are required to pay interest at the rate of 6% p.a. on the float on the mobile wallet.
Proposal
The Board of Directors of Excellent Telephone Service Ltd at a recent meeting discussed the possibility of opening a new unit to provide mobile money service to take advantage of the newly regulated industry. The Finance Director has presented a five-year estimates for the new venture as:

For taxation purposes, capital allowances will be available against the taxable profits of the venture, at 25% per annum on a reducing balance basis and in year 5 any balance would be granted as additional capital allowance. The rate of tax on taxable profits is 25% and tax is paid one year in arrears. The capital assets will have a zero-salvage value at the end of 5 years. The after-tax weighted average cost of capital is estimated to be 24% per anum.
Required:
Assess THREE environmental factors faced by Excellence Telephone Service Ltd.                                                    (6 marks)

CASE STUDY: ALPHA MINERAL WATER LIMITED
Introduction
Alpha Mineral Water Limited is one of the many companies producing bagged and bottled mineral water. The company was established in 2010 and has grown rapidly. Mr. Kwasi Kwakye has served as the managing director since the inception of the company. He is an accomplished entrepreneur and has received many awards both at home and abroad.
The Industry
The competition in the bagged and bottled water industry revolves around pricing as each producer attempts to use penetration pricing strategy in order to capture maximum market share. Most of the materials used in the industry are imported.

A decade ago, the industry had few players. Currently, there are numerous companies with low exit rate. The industry for most part of its existence, has remained unregulated and does not require huge initial capital. Since the inception of production of bagged and bottled mineral water, the government has been battling rubber pollution in major urban centres. The drainage systems are often choked with used plastic materials, which are not biodegradable. To address this menace, government is considering a special tax to raise money to clear the waste. Again, a bill is before parliament which when passed into law would require all to use biodegradable materials for packaging their products.

Based on the concern expressed by the government over the years, a new body known as Plastic Waste Regulatory Authority was set up early 2015 to regulate the industry. The regulator is expected to enforce certain minimum standards to sanitise the industry and minimise the effect of its activities on the environment. This measure, according to the experts, will restrict new producers entering the sector.

The bagged and bottled mineral water produced is sold to corporate bodies in the form of water dispensers and bottled water. Also, they supply water to households and retailers through key distributors. The margins of the key distributors are very low and only make reasonable profit on huge volumes. As a result, the key distributors tend to resist any price hikes by the producers. The past experience shows that anytime price increases, demand slows down as alternative sources of drinking water are sought by consumers. Again, some bulk distributors who perceive producers as raking in so much profit have ventured into production of bagged and bottled water in the past. Corporate clients are also cutting their expenditure on water. There are some companies that have commenced importation of bottled mineral water for their own use.

Most of the companies in the industry depend on only two sources of water – Ghana Water Company (GWC) or bore hole. The industry water demand constitute 8% of GWC output. The producers have also not formed any association to deal with issues affecting them collectively. The water supply is increasingly becoming erratic, unreliable and very expensive with the withdrawal of government subsidies, further squeezing the margins of the sector. The working conditions of most of the workers in the sector is nothing to write home about and it has been difficult negotiating for better conditions, since they did not belong to any labour union. However, with the passage of the new labour law, it has become easier for the workers to join existing labour unions. As a result, most of the workers now belong to Industrial Workers Union.

The producers within the sector have a fair share of the market and no single company dominates the market. The market survey conducted indicates that the highest market share of the leading companies is 10%.

Expansion Plans
Alpha Mineral Water Ltd currently has presence only in Accra and its surrounding settlements. The company is proposing to expand its operations to four regional capitals in the country. The details of the proposed investment is presented as follows:
The company has estimated investment outlays of GH¢200,000 fixed capital items. This outlay includes GH¢25,000 to be expended to acquire the land for the factory. The rest of the amount will be incurred on water processing and packaging plant that will be depreciated on straight-line basis over five years with scrap value. At the end of fifth year, the company will sell off the assets for GH¢60,000. Additional initial investment is expected to be made in receivables and inventory of GH¢50,000 and the short-term payables of GH¢20,000 will be generated by the project. No further investment would be made in working capital during the project life and the initial investment would be recouped at the end of the fifth year.
The Board of Directors have tasked the Finance Director to advise the Board on whether to lease or buy the plant using a bank loan.
The company could purchase the plant for cash using a bank loan on which the current rate of interest is 20% before tax. The trade-in value is GH¢20,000. If the plant is purchased, the company can claim tax depreciation allowance of 25%, on a reducing balance basis over the plant’s five year life.
The company could lease the plant under an agreement which would entail payment of GH¢52,000 at the end of each year for the next five years. The tax authorities allow lease payment for tax purposes.
The corporate rate of tax is 25% and tax is payable one year in arrears. The company’s required rate of return is 15%.
Required:
a) Assess the general environment in which Alpha Mineral Water Ltd operates.                                                             (12 marks)

CASE STUDY: GRACE TELECOM LIMITED
Introduction
Grace Telecom Ltd. is a well-established company which is providing telecommunications services both nationally and internationally. Its business has been concerned with telephone calls, the provision of telephone lines and equipment, and private telecommunication networks. Grace Telecom Ltd. has supplemented these services recently by offering mobile phone, which is an expanding market worldwide
The company maintains a diverse customer base, including residential users, multi-national companies, government agencies and public sector organisations. The company handles approximately 100,000 million calls each working day, and employs nearly 140 personnel.
Strategic development
The Chairman of Grace Telecom Ltd stated within its latest Annual Report that there were three main areas in which the company aimed to develop in order to remain a world leader in the telecommunications market. He believes that the three main growth areas reflect the evolving nature of the telecommunications market and will provide the scope for development.
The areas in which development is planned are:

• expansion of the telecommunications business in the national and overseas markets, both by the company acting on its own and through partnership arrangements with other suppliers
• diversification into television and multi-media services, providing the hardware to permit telephone shopping from home and broadcasting services
• extension of the joint ventures and strategic alliances which have already been established with companies in West Africa.
  The Chairman explained that the company is intent on becoming a world leader in communications. This will be achieved through maintaining its focus on long-term development by improving its services to customers, developing high quality up-to-date products and being innovative, flexible and market-driven. His aim is to deliver a world-class service at competitive cost.
  Financial information
  The following comparative statistics show extracts from the company’s financial performance in its national telecommunications market over the last two years:
  

The company estimates its cost of capital to be approximately 18%.
The Chairman expressed satisfaction with the increase in turnover and stated that cost efficiencies were now being generated following the completion of a staff reduction programme. This would assist the company in achieving a target return on capital employed (ROCE) of 20% in this market over the next three years.
Business opportunities
The Chief Executive of Grace Telecom Ltd. has stated that the major opportunities for the company lie in the following areas:

• encouraging greater use of the telephone
• provision of advanced services, and research and development into new technology, including the internet and systems integration.

the increasing freedom from government control of worldwide telecommunication services.
An extensive television and poster advertising campaign has been used by the company. This was in order to penetrate further the residential market segment by encouraging greater use of the telephone with various charging incentives being offered to residential customers.
To further the objective of increasing long-term shareholder value, the company is actively considering an investment of GHS200 million in each of the next three years in new technology and quality improvements in its national market. Because of its specialist technical nature, the investment is not expected to have any residual value at the end of the three-year period.
Following the investment, the directors of Grace Telecom Ltd. believe that its rate of profit before interest and tax to turnover in its national telecommunications market will remain constant. This rate will be at the same level as last year for each of the three years of the investment.
Markets and competition
The company is currently experiencing an erosion of its market share and faces increasingly strong competition in the mobile phone market. While Grace Telecom Ltd. is the leader in its national market, with an 85% share of the telecommunications business, it has experienced a reduced demand for the supply of residential lines in the last five years as competition has increased.
The market for the supply of equipment in the national telecommunications market is perceived to be static. The investment of GHS200 million in each of the next three years is estimated to increase Grace Telecom Ltd.’s share of this market to a level of 95%. The full improvement of 10% is expected to be received by Grace Telecom Ltd. next year, and its market share will then remain at this level for the full three-year period. It is anticipated that unless further investment is made after the three-year period, Grace Telecom Ltd.’s market share will revert to its current level as a consequence of the expected competitive response.
Industry regulation
The government has established an industry regulatory organisation to promote competition and deter anti-competitive behaviour.
As a result of the activities of the regulator and aggressive pricing strategies, it is anticipated that charges to customers will remain constant for the full three-year period of the new investment.
All cash flows can be assumed to occur at the end of the year to which they relate. The cash flows and discount rate are in real terms.
Future outlook
The business still remains under family control, but the board is considering an expansion programme for which and that the family would need to raise GH¢200 million in equity or debt finance. One of the possible risks of expansion lies in the fact that the market for fixed telephone lines is falling. New income is being generated by expanding the product range to include mobile money transfer. The key to profit growth for Grace Telecom is the ability to generate sales growth, but the company recognizes that it faces stiff competition from large telecom companies in respect of the prices charged.
In planning its future, Grace Telecom is advised to look carefully at a number of external factors which may affect the business including government economic policy. In recent months the following information has been published in respect of key economic data.
i) Bank base rate has been reduced from 22% to 20%, and the forecast is for a further 0.5% reduction within six months.
ii) The annual rate of inflation is now 12%, down from 14% in the previous quarter, and 16% 12 months ago. No further falls in the rate are expected over the medium term.
iii) Personal and corporate tax rates are expected to remain unchanged for at least twelve months.
Required:
Explain the nature of the political, economic, social, and technological forces which will influence Grace Telecom Ltd. in developing its business and increasing its market share.                                                                               [8 marks]