$10\%$ and the expected return on the market is $18\%.$ In the UK Corporation Tax is payable at

$35\%,$ one year in arrears. Oriental operates on a $5-$year planning horizon. At the end of five

years, assume that working capital would be fully recovered and the production equipment

would have a scrap value, at that time, of $35m$ before tax. Proceeds on asset sales are taxed

at $40\%.$ Assume all cash flows arise at the end of the year to which they relate, unless otherwise

stated.

Required:

Evaluate the proposed investment in France and recommend what investment decision should

be made by Oriental firm. State clearly any assumptions you make and work all calculations

rounded to nearest $10,000($either $$ or $)-$ i$.$e$.0\mathrm{.}01$ m or $0\mathrm{.}01m$ To be submitted Individually by $4^{th},$ August, $2024$

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Oriental construction firm is a manufacturer of window frames. Its main UK manufacturing

operation is based in the North of England, from where it distributes its products throughout

the UK$.$ The directors are now considering whether they should open up an additional

manufacturing operation in France $-$ which they believe there will be a good market for their

products. A suitable factory has been located just outside Paris that could be rented on a $5-$year

lease at an annual charge of $1\mathrm{.}9m,$ payable each year in advance.

The manufacturing equipment would cost $37\mathrm{.}5m,$ of which $30m$ would have to be paid at the

start of the project, with the balance payable $12$ months later. At the start of each year the

French factory would require working capital equal to $20\%$ of that year's sales revenues. It is

expected that the factory will be able to produce and sell $40,000$ window units per year

although, in the first year, because of the need to 'run in$\text{'}$ the machinery and its new workforce,

output is only expected to be $25,000$ window units. Each window is likely to be sold for $375,$

price that represents a $150\%$ mark up on cash production costs. The French factory would be

set up as a wholly$-$owned subsidiary of Oriental. In France, $25\%$ straight$-$line depreciation on

cost is an allowable expense against company tax. Corporation tax is payable at $40\%$ at each

year$-$end without delay and any unused losses can be brought forward for set off against the

following year's profits. No UK tax would be payable on the after$-$tax French profits. All

amounts in $$ are given in current terms. Annual inflation in France is expected to run at $6\%$ per

year in the foreseeable future. All $$ cash flows involved are expected to increase in line with

this inflation rate, with the exception of the factory rental and the cost of the manufacturing

equipment, both of which would remain unchanged. The French factory would be producing

windows to a special design patented by Oriental. To protect its patent rights, Oriental will

charge its French subsidiary a fixed royalty of $10$ per window. This cost would be allowable

against the subsidiary's French tax liability. The current $/1$ spot rate is $1\mathrm{.}5.$ Inflation in the UK

is expected to be $4\%$ per year over the period. There are no remittance restrictions between

France and the UK$.$

Oriental is an all$-$equity financed company that is quoted on the London Stock Exchange. Its

shares have a beta value of $1\mathrm{.}25.$ The current annual return on UK Government Treasury Bills isA manufacturer of window frames knows from long experience that $\backslash (5\backslash \%\backslash )$ of the production will have som type of minor defect that will require an adjustment. What is the probability that in a sample of $20$ window frames at most two will need adjustment?