A project consists of paying £10m immediately for a clean-up. Then, over the next two years, spending another £28m building an office complex (£8m in year 1 and £20m in year 2). Tenants would not be found immediately on completion of the building. The office units would be let gradually over the following three years. In year 3, ¼ of the offices are let, netting £2m. In year 4, ½ of the offices are let, netting £4m. In year 5, all offices are let, bringing a net rental income of £8m. Finally, when the office complex is fully let, in six years' time, it would be sold to an institution, such as a pension fund, for the sum of £80m. If the project was never taken up, the site could've been sold at year t=0 for £12m.

 a) Calculate the profitability if the project is taken up

b) Using a discount rate of 15%, calculate the Net Present Value (NPV) of the project. Please ensure that you explain all your calculations in words

 c) Based on your profitability and NPV figures, would you recommend that the company goes ahead with the project? Provide a detailed rationale

Using the CAPM as a benchmark, explain the Fama and French Three Factor Model, paying close interpretation to the calculation and interpretation of each risk factor. 

 You have a choice to invest in either portfolio A or B. Based on the values provided below, what can you say about each portfolio's risk adjusted performance? Which portfolio do you choose to invest in? Please provide rationale for your answer 

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Return Variance Beta SMB HML Risk free rate Portfolio A 10% 2.8% 1.5 1.2 1.8 Portfolio B 8% 2.0% 0.9 0.8 1.7 1% Return Variance Beta SMB HML Risk free rate Portfolio A 10% 2.8% 1.5 1.2 1.8 Portfolio B 8% 2.0% 0.9 0.8 1.7 1%

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SOLUTION a Calculate profitability if project is taken up Year 0 Cost of cleanup 10m Year 1 Cost of ... View the full answer