Question 11.2 Ukec plc, a company of diverse interests, is considering the purchase of a factory on the European mainland in order to take advantage of the greater market opportunities that changes in European Community regulations will bring.

The following information is available on the factories under consideration:

Factory A Factory B Factory C

(£ million) (£ million) (£ million)

Purchase cost 50 100 90 Estimated net cash inflows Year 1 3 10 15 Year 2 6 15 19 Year 3 14 30 26 Year 4 16 45 40 Year 5 20 60 45 Factory A was still only 70 per cent complete and it is estimated that a further

£25 million would be needed to complete the factory ready for production in year 1.

The cost of capital of the company is estimated at 10 per cent.

Subsequent to the preparation of the forecast data above, the company’s economic research department has provided the following information: