DP is considering whether to purchase a piece of land close to a major city airport. The land will be used to provide 600 car parking spaces. The cost of the land is $6 000 000 but further expenditure of $2 000 000 will be required immediately to develop the land to provide access roads and suitable surfacing for car parking. DP is planning to operate the car park for five years after which the land will be sold for $10 000 000 at Year 5 prices. A consultant has prepared a report detailing projected revenues and costs.
Revenues
It is estimated that the car park will operate at 75 percent capacity during each year of the project.
Car parking charges will depend on the prices being charged by competitors. There is a 40 percent chance that the price will be $60 per week, a 25 percent chance the price will be $50 per week and a 35 percent chance the price will be $70 per week.
DP expects that it will earn a contribution to sales ratio of 80 percent.
Fixed operating costs
DP will lease a number of vehicles to be used to transport passengers to and from the airport. It is expected that the lease costs will be $50 000 per annum.
Staff costs are estimated to be $350 000 per annum.
The company will hire a security system at a cost of $100 000 per annum.
Inflation

All of the values above, other than the amount for the sale of the land at the end of the five-year period, have been expressed in terms of current prices. The vehicle leasing costs of $50 000 per annum will apply throughout the five years and are not subject to inflation.
Car parking charges and variable costs are expected to increase at a rate of 5 percent per annum starting in Year 1.
All fixed operating costs excluding the vehicle leasing costs are expected to increase at a rate of 4 percent per annum starting in Year 1.
Other information
The company uses net present value based on the expected values of cash flow when evaluating projects of this type.
DP has a money cost of capital of 8 percent per annum.
DP’s financial director has provided the following taxation.

information:
● Tax depreciation is not available on either the initial cost of the land or the development costs.
● Taxation rate: 30 percent of taxable profits. Half of the tax is payable in the year in which it arises, the balance is payable in the following year.
All cash flows apart from the initial investment of $8 000 000 should be assumed to occur at the end of the year.

Required:
(a) Evaluate the project from a financial perspective. You should use net present value as the basis of your evaluation and show your workings in $000.
(b) CaIcuIate the internal rate of return (IRR) of the project.
The main reason why discounted cash flow methods of investment appraisal are considered theoretically superior is that they take account of the time value of money.
(c) Explain the THREE elements that determine the ‘time value of money’ and why it is important to take it into consideration when appraising investment projects.