1 company is considering setting up a branch. The company is aware that ccess to capital may become difficult in twelve years time. It therefore has wo decision criteria. The following cashflows are generated at an effective aterest rate if 9% per annum: - Outflows: Between the present time and the opening of the branch in three years time the company will spend 1.5 million per annum on research and development of products. This outlay is a constant continuous payment stream. The rent on the branch building will be 0.3 million per annum paid quarterly in advance for twelve years starting in three years time. Staff costs are assumed to be 1 million in the first year, 1.05m in the second year, rising by 5% per annum each year thereafter. Staff costs are assumed to be incurred at the beginning of each year starting in three years time and assumed to be incurred for 12 years. - Inflows: The company expects the sale of products to produce a net income at a rate of 1 million per annum for the first three years after the branch opens rising to 1.9 million per annum in the next three years and to 2.5 million for the following six years. This net income is assumed to be received continuously throughout each year. The company expects to be able to sell the branch operation 15 years from the present time for 8m. (a) Calculate the present values of the outflows and inflows. [5] (b) Plot the net present value of the project, NPV(i) for i=1%,2%,,9%. Comment on the figure. (c) Calculate the internal rate of return. Comment on your answer. (d) If the company decides to consider an effective interest rate of 7%, is the discounted payback period less than 12 years ? Justify and comment on your answer. [10] (e) If the company decides to sell the branch after 10 years, repeat (a), (b), (c) and (d). [10] (f) Compare your results with the ones in (b), (c) and (d). Maybe plot some figures. 1 company is considering setting up a branch. The company is aware that ccess to capital may become difficult in twelve years time. It therefore has wo decision criteria. The following cashflows are generated at an effective aterest rate if 9% per annum: - Outflows: Between the present time and the opening of the branch in three years time the company will spend 1.5 million per annum on research and development of products. This outlay is a constant continuous payment stream. The rent on the branch building will be 0.3 million per annum paid quarterly in advance for twelve years starting in three years time. Staff costs are assumed to be 1 million in the first year, 1.05m in the second year, rising by 5% per annum each year thereafter. Staff costs are assumed to be incurred at the beginning of each year starting in three years time and assumed to be incurred for 12 years. - Inflows: The company expects the sale of products to produce a net income at a rate of 1 million per annum for the first three years after the branch opens rising to 1.9 million per annum in the next three years and to 2.5 million for the following six years. This net income is assumed to be received continuously throughout each year. The company expects to be able to sell the branch operation 15 years from the present time for 8m. (a) Calculate the present values of the outflows and inflows. [5] (b) Plot the net present value of the project, NPV(i) for i=1%,2%,,9%. Comment on the figure. (c) Calculate the internal rate of return. Comment on your answer. (d) If the company decides to consider an effective interest rate of 7%, is the discounted payback period less than 12 years ? Justify and comment on your answer. [10] (e) If the company decides to sell the branch after 10 years, repeat (a), (b), (c) and (d). [10] (f) Compare your results with the ones in (b), (c) and (d). Maybe plot some figures