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3. A company is undertaking a new project. The project requires an investment of 4m at the outset, followed by 2m three months later. Additional
3. A company is undertaking a new project. The project requires an investment of 4m at the outset, followed by 2m three months later. Additional maintenance costs will be incurred from the start of year 2, being 100,000 payable continuously throughout year 2, 103,000 payable continuously throughout year 3, and increasing by 3% at the start of each year and payable continuously throughout each year up until the end of year 15. It is expected that the investment will provide income annually in arrear over a period of 14 years, at a rate of 1.5m per annum, starting at the end of the 2nd year. After the end of the 15th year there will be no further income from the investment and the project will end. (a) Draw a timeline and set out a table showing the timing and value of the expected cashflows for the project. [2] Calculate at an effective rate of interest of 10% per annum: (b) the net present value of the project at the outset [5] (c) the discounted payback period [6] (d) the accumulated profit at the end of the discounted payback period [2] A bank has offered to loan the funds required to the company at an effective rate of interest of 10% per annum. Funds will be drawn from the bank when required and the loan can be repaid at any time. Once the loan is paid off, the company can earn interest on funds from the venture at an effective rate of interest of 7% per annum. (e) Calculate the accumulated profit at the end of the 15 years. [5] [Total 20 marks]
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