2 marks) QUESTION 3 (a) Assume that you have won the jackpot and you want to drop out of school and set up your own business making wine coolers. You collect the following information on the initial costs: Cost of plant and equipment K500,000 Installation costs K 50,000 You estimate that you can sell 1 million bottles a year at K1 per bottle. You estimate that your costs are as follows: Variable costs/bottle K0.05 Fixed costs/per year K200,000 Tax is at 50 percent and you can use straight-line depreciation with zero salvage value over a project life of 5 years. If you use a discount rate of 10 percent, should you take on the project? (15 marks) (b) You want to buy a lodge at K350 million payable in 5 equal annual installments starting with a payment of K70 million now. You will then spend an additional K130 million immediately to improve the lodge. The lodge has five years to run on lease before it reverts to the government. If you buy and improve it, it will generate annual net revenues of K135 million for the next five years. If your hurdle rate is 15%, what is the NPV of these cash flow streams? (13 marks) Total: (25 marks)