Castan Properties plc is considering building a small shop on a disused site. The company would...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Castan Properties plc is considering building a small shop on a disused site. The company would occupy this shop to hire out and sell tools and equipment. The company has ready access to the funds required but one director has suggested that it would be better to use an overdraft or bank loan to finance the project. In fact, this director has already set up the initial agreements with the bank for a fee of £100. Estimates regarding the project are as follows: The land will cost an immediate £100,000. An immediate investment of £15,000 will be required to prepare the land. Building will take a year at an estimated cost of £60,000 and fitting out the shop will cost £20,000. These will be settled at the end of year 1 when the shop starts trading; however, the accountant has recognised their cost immediately. At the end of the fifth year the shop could be sold for £160,000. Further estimates include the following: Cash from sales / hire Cash variable costs Fixed costs Year 2 £000s REQUIRED: 100 50 22.5 Year 3 £000s 125 63 22.5 Year 4 £000s 150 75 22.5 Year 5 £000s 175 88 22.5 For the project to start the company will need to pay £10,000 to purchase new equipment the annual depreciation charge for this is included in the fixed costs figure shown above. The company uses straight-line depreciation, never assumes scrap values, and uses a 12% cost of capital. (a) Noting why any of the above items are omitted, calculate the Net Present Value (NPV) of undertaking the shop project and advise if the company should proceed. (14 marks) Castan Properties plc is considering building a small shop on a disused site. The company would occupy this shop to hire out and sell tools and equipment. The company has ready access to the funds required but one director has suggested that it would be better to use an overdraft or bank loan to finance the project. In fact, this director has already set up the initial agreements with the bank for a fee of £100. Estimates regarding the project are as follows: The land will cost an immediate £100,000. An immediate investment of £15,000 will be required to prepare the land. Building will take a year at an estimated cost of £60,000 and fitting out the shop will cost £20,000. These will be settled at the end of year 1 when the shop starts trading; however, the accountant has recognised their cost immediately. At the end of the fifth year the shop could be sold for £160,000. Further estimates include the following: Cash from sales / hire Cash variable costs Fixed costs Year 2 £000s REQUIRED: 100 50 22.5 Year 3 £000s 125 63 22.5 Year 4 £000s 150 75 22.5 Year 5 £000s 175 88 22.5 For the project to start the company will need to pay £10,000 to purchase new equipment the annual depreciation charge for this is included in the fixed costs figure shown above. The company uses straight-line depreciation, never assumes scrap values, and uses a 12% cost of capital. (a) Noting why any of the above items are omitted, calculate the Net Present Value (NPV) of undertaking the shop project and advise if the company should proceed. (14 marks)
Expert Answer:
Related Book For
Managerial Economics and Strategy
ISBN: 978-0321566447
1st edition
Authors: Jeffrey M. Perloff, James A. Brander
Posted Date:
Students also viewed these finance questions
-
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...
-
A bakery with a December 31 st year end purchased new equipment on October 31 st 2000 for $10,000. This was their first equipment purchase. Required: What are the tax consequences if the equipment is...
-
An array is bitonic if it consists of an increasing sequence of keys followed immediately by a decreasing sequence of keys. Given a bitonic array, design a logarithmic algorithm to find the index of...
-
Maximize f = 2x + 6y subject to x + y 7 2x + y 12 x + 3y 15 Solve the following linear programming problems. Restrict x 0 and y 0.
-
A fruit fly of height H sits in front of lens 1 on the central axis through the lens. The lens forms an image of the fly at a distance d = 20 cm from the fly; the image has the fly's orientation and...
-
Solve the following boundary value problem: \[y^{\prime \prime}(x)=f(x), \quad y(0)=0, \quad y(1)=0\] Hence solve \(y^{\prime \prime}(x)=x^{2}\) subject to the same boundary conditions.
-
Why has eBay succeeded as an online auction marketplace while so many others have failed?
-
Less: Cost of goods sold Gross margin Less: SG&A expenses Operating profit margin EXHIBIT 1 Financial Data for Tiffany and TJX (in thousands) Net sales TIFFANY & CO. Income Statement TJX (YEAR...
-
What does the current portion of long term debt represent? In periods of rising prices, which inventory method (LIFO or FIFO) will provide you with a higher net income? Record the journal entry to...
-
[32 pts] 4. An education economist is analyzing the amount of annual tuition (and fees) paid by university students. The economist believes that the tuition amount is closely related to the number of...
-
You are a financial manager of Netflix Inc. (symbol: NFLX). You are considering the purchase of a promising new software company in California. Your objective is to determine the present value of the...
-
assume that T is a linear transformation. Find the standard matrix of T.
-
compute discounts, evaluate how discounts are used to influence consumer purchases, and identify the best discount option when shopping. Calculating the example: Disount is: $29.99 x 15% = $4.50 Sale...
-
Let A ERmxn with m
-
(a) With the aid of a diagram, explain the concept of cogeneration and trigeneration in a power plant. (b) A trigeneration system can cover cooling and power load that are commonly covered by a...
-
What does non-recourse financing mean?
-
A large city has nearly 500 restaurants, with new ones entering regularly as the population grows. The city decides to limit the number of restaurant licenses to 500. Which characteristics of this...
-
The invention of a new machine serves as a mobile station for receiving and accumulating packed flats of strawberries close to where they are picked, reducing workers time and burden of carrying full...
-
In a perfectly competitive market, all firms are identical there is free entry and exit, and an unlimited number of potential entrants. Now, the government starts collecting a specific tax t. What is...
-
A nickel crystals work function is measured to be 5.22 eV at 25C. As the temperature increases by 300C, the work function drops by 50 meV. By how much does this shift the threshold wavelength for...
-
A crystal sample of bacteriorhodpsin, a light-sensitive protein found in halobacteria that responds to light energy, has crystal planes separated by 0.20 nm. If a beam of 11 keV x rays illuminates a...
-
Investigators have created structures consisting of linear chains of ionized atoms on a smooth surface. Electrons are restricted to travel along the chain. The energy levels of the electrons match...
Study smarter with the SolutionInn App