3. You have been asked to advise a company, which is a large frozen food-supply to supermarkets in the UK, on their decision of whether to build, buy or rent its own retail store in London. The following data has been ascertained: The company is seeking a small to medium retail space of around 150,000 square feet in a good central location in the City. Agents have found a plot in an area of regeneration, which is less than perfectly located, but where the existing old buildings are being demolished and half the site is of sufficient size and is for sale at 10 million. The costs to build, including architect fees and all building contract, fixtures and fittings costs have been estimated at 450 per square foot. The new build could be ready within a year. Alternatively, they have found existing shop premises for sale, which are about to be vacated by a retailer that recently merged and is closing a few stores where they now have two close together. This is on the market for 30 million, but would need refitting at a cost of 6 million (this includes removal of existing fixtures). The premises will be vacated in 9 months' time and refitting etc. will be completed in 3 months. The third option is to take a space in a newly refurbished shopping mall, where the landlord is offering a 10 year lease to rent at 60 per square foot initially, with a rent review in 3 years. The shop unit will be offered as a shell and new fixtures and fittings are likely to cost 6 million to be ready in a year. The agents' advice is that the rent could rise to 70 per square foot by then. Agents and the associated law firm will together charge a fee of 6% of the annual rent for finding and negotiating the leasehold property or a 2% finder's fee on the purchase price of the property or building plot that is for sale. There is also a stamp duty payable at 4% on any purchase. The company's depreciation policy is to write off property assets over 40 years and fixtures and fittings over 5 years. The company has access to secured borrowing at an annual rate of 3% interest Required: a) Evaluate the net present value of the project based on the above data and calculate the payback period if the company decides to stay open 5 years. You must advise whether it should go ahead with the new project based on your analysis and state your assumptions. I [16 marks) b) Evaluate the effect of each of the following changes independently and advise the company on the implications: 1) If the company decides to operates the retail store for 10 years instead; ii) Given the central location of this store and the house booming price in the UK, after the first 5 years, the store price gained an 8% annual increment in its market value. iii) If both market conditions and forecasts in i) and ii) are maintained at the same time that the company borrows money at 5% annual interest rate. 19 marks 3. You have been asked to advise a company, which is a large frozen food-supply to supermarkets in the UK, on their decision of whether to build, buy or rent its own retail store in London. The following data has been ascertained: The company is seeking a small to medium retail space of around 150,000 square feet in a good central location in the City. Agents have found a plot in an area of regeneration, which is less than perfectly located, but where the existing old buildings are being demolished and half the site is of sufficient size and is for sale at 10 million. The costs to build, including architect fees and all building contract, fixtures and fittings costs have been estimated at 450 per square foot. The new build could be ready within a year. Alternatively, they have found existing shop premises for sale, which are about to be vacated by a retailer that recently merged and is closing a few stores where they now have two close together. This is on the market for 30 million, but would need refitting at a cost of 6 million (this includes removal of existing fixtures). The premises will be vacated in 9 months' time and refitting etc. will be completed in 3 months. The third option is to take a space in a newly refurbished shopping mall, where the landlord is offering a 10 year lease to rent at 60 per square foot initially, with a rent review in 3 years. The shop unit will be offered as a shell and new fixtures and fittings are likely to cost 6 million to be ready in a year. The agents' advice is that the rent could rise to 70 per square foot by then. Agents and the associated law firm will together charge a fee of 6% of the annual rent for finding and negotiating the leasehold property or a 2% finder's fee on the purchase price of the property or building plot that is for sale. There is also a stamp duty payable at 4% on any purchase. The company's depreciation policy is to write off property assets over 40 years and fixtures and fittings over 5 years. The company has access to secured borrowing at an annual rate of 3% interest Required: a) Evaluate the net present value of the project based on the above data and calculate the payback period if the company decides to stay open 5 years. You must advise whether it should go ahead with the new project based on your analysis and state your assumptions. I [16 marks) b) Evaluate the effect of each of the following changes independently and advise the company on the implications: 1) If the company decides to operates the retail store for 10 years instead; ii) Given the central location of this store and the house booming price in the UK, after the first 5 years, the store price gained an 8% annual increment in its market value. iii) If both market conditions and forecasts in i) and ii) are maintained at the same time that the company borrows money at 5% annual interest rate. 19 marks