Mercia plc owns two acres of derelict land near to the centre of a major UK...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Mercia plc owns two acres of derelict land near to the centre of a major UK city. The firm has received an invoice for £50,000 from consultants who were given the task of analysis, investigation and design of some project proposals for using the land. The consultants outline the two best proposals to a meeting of the board of Mercia. Proposal 1 is to spend £150,000 levelling the site and then constructing a six-level car park at an additional cost of £1,600,000. The earthmoving firm will be paid £150,000 on the start date. and the construction firm will be paid £1.4m on the start date, with the balance payable 24 months later. It is expected that the car park will be fully operational as from the completion date (365 days after the earthmovers first begin). The annual income from ticket sales will be £600,000 to an infinite horizon. Operational costs (attendants, security, power, etc.) will be £100,000 per annum. The consultants have also apportioned £60,000 of Mercia's central overhead costs (created by the London-based head office and the executive jet) to this project. The consultants present their analysis in terms of a commonly used measure of project viability, that of payback. This investment idea is not original; Mercia investigated a similar project two years ago and discovered that there are some costs which have been ignored by the consultants. First, the local council will require a payment of £100,000 one year after the completion of the construction for its inspection services and a trading and environmental impact licence. Second, senior manage- ment will have to leave aside work on other projects, resulting in delays and reduced income from these projects amounting to £50,000 per year once the car park is operational. Also, the proposal is subject to depreciation of one-fiftieth (1/50) of the earthmoving and construction costs each year. Proposal 2 is for a health club. An experienced company will, for a total cost of £9m payable at the start of the project, design and construct the buildings and supply all the equipment. It will be ready for Mercia's use one year after construction begins. Revenue from customers will be £5m per annum and operating costs will be £4m per annum. The consultants allocate £70,000 of central general head office overhead costs for each year from the start. After two years of operating the health club Mercia will sell it for a total of £11m. Information not considered by the consultants for Proposal 2 The £9m investment includes £5m in buildings not subject to depreciation. It also includes £4m in equipment, 10 per cent of which to be replaced each year. This has not been included in the operating costs. A new executive will be needed to oversee the project from the start of the project - costing £100,000 per annum. The consultants recommend that the board of Mercia accept the second proposal and reject the first. Assume - If the site was sold with no further work carried out it would fetch £100,000. - No inflation or tax. - The cost of capital for Mercia is 10 per cent. - It can be assumed, for simplicity of analysis, that all cash flows occur at year ends except those occurring at the start of the project. Required a Calculate the net present value of each proposal. State whether you would recommend Proposal 1 or 2. b Calculate the internal rate of return for each proposed project. Mercia plc owns two acres of derelict land near to the centre of a major UK city. The firm has received an invoice for £50,000 from consultants who were given the task of analysis, investigation and design of some project proposals for using the land. The consultants outline the two best proposals to a meeting of the board of Mercia. Proposal 1 is to spend £150,000 levelling the site and then constructing a six-level car park at an additional cost of £1,600,000. The earthmoving firm will be paid £150,000 on the start date. and the construction firm will be paid £1.4m on the start date, with the balance payable 24 months later. It is expected that the car park will be fully operational as from the completion date (365 days after the earthmovers first begin). The annual income from ticket sales will be £600,000 to an infinite horizon. Operational costs (attendants, security, power, etc.) will be £100,000 per annum. The consultants have also apportioned £60,000 of Mercia's central overhead costs (created by the London-based head office and the executive jet) to this project. The consultants present their analysis in terms of a commonly used measure of project viability, that of payback. This investment idea is not original; Mercia investigated a similar project two years ago and discovered that there are some costs which have been ignored by the consultants. First, the local council will require a payment of £100,000 one year after the completion of the construction for its inspection services and a trading and environmental impact licence. Second, senior manage- ment will have to leave aside work on other projects, resulting in delays and reduced income from these projects amounting to £50,000 per year once the car park is operational. Also, the proposal is subject to depreciation of one-fiftieth (1/50) of the earthmoving and construction costs each year. Proposal 2 is for a health club. An experienced company will, for a total cost of £9m payable at the start of the project, design and construct the buildings and supply all the equipment. It will be ready for Mercia's use one year after construction begins. Revenue from customers will be £5m per annum and operating costs will be £4m per annum. The consultants allocate £70,000 of central general head office overhead costs for each year from the start. After two years of operating the health club Mercia will sell it for a total of £11m. Information not considered by the consultants for Proposal 2 The £9m investment includes £5m in buildings not subject to depreciation. It also includes £4m in equipment, 10 per cent of which to be replaced each year. This has not been included in the operating costs. A new executive will be needed to oversee the project from the start of the project - costing £100,000 per annum. The consultants recommend that the board of Mercia accept the second proposal and reject the first. Assume - If the site was sold with no further work carried out it would fetch £100,000. - No inflation or tax. - The cost of capital for Mercia is 10 per cent. - It can be assumed, for simplicity of analysis, that all cash flows occur at year ends except those occurring at the start of the project. Required a Calculate the net present value of each proposal. State whether you would recommend Proposal 1 or 2. b Calculate the internal rate of return for each proposed project.
Expert Answer:
Answer rating: 100% (QA)
a Proposal 1 NPV 50000 1600000111 150000110 1400000111 ... View the full answer
Related Book For
Business Math
ISBN: 978-0133011203
10th edition
Authors: Cheryl Cleaves, Margie Hobbs, Jeffrey Noble
Posted Date:
Students also viewed these accounting questions
-
The Ski Shop received an invoice for $9600 dated August 11, terms 5/10, 2/30, n/90, for a shipment of skis. The Ski Shop made two partial payments. (a) How much was paid on August 20 to reduce the...
-
The Gurney Corporation received an invoice for $5,893.21 for carbon-neutral printing supplies. The invoice had terms of 2/15, n/30. The firm decided to make a partial payment of $3,500 within the...
-
On June 29, Josef received an invoice for $815.49, dated June 27. If the terms of the invoice are 2/10, 1/20, n/60, what amount is required on July 7 to pay the invoice in full?
-
What is the discount yield, bond equivalent yield, and effective annual return on a $ 5 million commercial paper issue that currently sells at 98.625 percent of its face value and is 136 days from...
-
Find the impulse response and transfer function of a filter matched to a triangular waveform as shown in the accompanying figure when the noise is stationary and white with a power spectrum of No /...
-
Make a geometric argument, based on how the field lines spread out into space, that the magnitude of the electric field surrounding a long, straight, charged wire is proportional to \(1 / r\), where...
-
Which type of bond is unsecured? a. Common bond b. Mortgage bond c. Serial bond d. Debenture bond
-
A new employee has been given responsibility for preparing the consolidated financial statements of Sample Company. After attempting to work alone for some time, the employee seeks assistance in...
-
A company requires 1000 units per month of an oil filter from a supplier to produce its final produce. Ordering cost, and the annual inventory carrying charge for the filter are estimated at S = $25...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
The Roopchand Departmental Stores, New Delhi, has a separate section to sell winter garments. This section consists of two groups : permanent clerks and temporary clerks appointed during winter...
-
Examine the Nurse Practice Act in your state. What opportunities exist for APRNs to expand their scope of practice? What can you do to effect legislative change?
-
Why is it argued that a central bank should be independent of the government?
-
Partnerships between acute care and community-based settings improve continuity of care. How do these partnerships influence reimbursement for health systems?
-
Identify each participant and its role in the process by which the money supply changes and monetary policy is implemented.
-
Each year, millions of American investors pour billions of dollars into investment companies, which use those dollars to buy the common stock of other companies. What do the investment companies...
-
Case Study: Credit and Inventory Management at XYZ Company XYZ Company is a retail business that sells electronic devices. They offer credit options to customers who wish to purchase products on...
-
What is your opinion of advertising awards, such as the Cannes Lions, that are based solely on creativity? If you were a marketer looking for an agency, would you take these creative awards into...
-
You have a receipt for a purchase that shows the total amount of the purchase to be $318.97. The sales tax rate is 8.25%. How much of the $318.97 is the cost of the item and how much is sales tax?
-
From Table 5 - 2, 1.0000 USD is equivalent to 0.011126 JPY. Use a proportion to convert 250 USD to the equivalent amount of JPY currency? TABLE 5-2 Currency Exchange Rate Table Curreney names British...
-
Charlie Bryant has a child who will be college age in five years. How much must he set aside today to have $20,000 for college tuition in five years if he gets 1.5% annually, compounded annually?
-
Explain what the following terms mean a. Accounts receivable f. Accounts payable b. Supplies g. Unearned service revenue c. Prepaid rent h. Service revenue d. Furniture i. Rent expense e. Accumulated...
-
Which columns of the accounting work sheet show unadjusted amounts? a. Trial balance b. Adjustments c. Income Statement d. Balance Sheet
-
Riley Insurance Agency reported the following items at May 31: Make Riley's closing entries, as needed, for these accounts. Sales and marketing expense Other assets Depreciation expense Long-term...
Study smarter with the SolutionInn App