Ice plc has decided to expand sales in Northland because of increasing pressure in its domestic market. It is evaluating two alternative expansion proposals.
Proposal 1
Ice plc could increase production from an existing UK site. This would require initial investment of £750,000 and give export sales worth £280,000 per year before tax.
Proposal 2
Ice plc could build a factory in Northland at a cost of N$2.7m. Annual sales from the factory would initially be N$1m before tax, but these are expected to increase each year. The rate of increase each year will depend on economic conditions in Northland, as follows:

Forecast exchange rates

Further information
Ice plc pays UK corporation tax one year in arrears at a rate of 30 per cent per year. For investment appraisal purposes the company uses a seven-year planning period and ignores terminal values. Its weighted-average cost of capital is 12 per cent after tax. Any foreign company investing in Northland pays profit tax to the Northland government one year in arrears at a rate of 30 per cent per year.
(a) Using the information provided, calculate which proposal should be adopted, explaining any assumptions that you make.
(b) Critically discuss the evaluation process used in part (a) and suggest what further information could assist Ice plc in evaluating the two investment proposals.

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Economic conditions in Northland Probability of these conditions occurring Annual increase in sales Good Moderate Poor 60% 5% 25% 15% 6% 4% Year0 2 6 NS/E 3.60 3.74 3.89 4.05 4.21 4.34 4.55 4.74 4.92