Advanced Mobile Phones (AMP) is a UK company which specialises in the construction and operation of low cost mobile phone franchises in developing

countries. It is currently considering a new project in a small African country. You are responsible for the department which was asked to assess the attractiveness

of this project. The project will involve an upfront payment to the government for the franchise. Then, the construction and installation of the mobile phone network

infrastructure, which will be outsourced to a major Chinese telecommunications equipment and services company. This work is planned to start in 2014 and finish

in 2017 when the network will be available for use. It will then be operated by AMP which will handle ongoing operations. The projected cost of the franchise is 500 million and the construction cost is an additional 200 million, both of which need to be paid in full at the beginning of the construction period. AMP has also invested 100 million in market research to help make the decision as to whether to bid on this franchise. The analyst has conducted demographic and historical research in order to estimate the expected numbers of subscribers to the service. The findings from this research are presented in Exhibit 1. He has made a number of assumptions about the market penetration ratios (share of AMP subscribers to total mobile phone subscribers in the country) and the number of calls, texts and downloads per subscriber. These

assumptions are based on historical studies from other countries that AMP and its competitors have entered into in earlier periods. In Exhibit 1, the analyst has also estimated the projected pre-tax cash flows for the project. These cash flows will stem from four different revenue streams: monthly subscription fees, charges for pay-as-you go calls, and revenues from texts and data downloads as these are not included in the basic monthly plans that the company plans to offer in this country. These cash flows are shown in GBP but will actually be collected in the local currency. The analyst has also made assumptions above future prevailing currency exchange rates in order to conduct the analysis in a single currency. Taxes are payable one year in arrears. No capital allowances are available for construction cost or franchise payment.. The capital structure of the project is presented in Exhibit 2. The bank loan is a 20-year fixed-rate loan with the principal paid back at the end of the loan period.

The interest rate on this loan is 7% per annum. After 2021, the projects free cash flows are expected to grow at a constant rate of 3% per annum. You have also

conducted some research and collected some market data which is presented in

Exhibit 3. Note that all cash flows are in nominal terms.

1. Calculate the NPV for this project as at the start of 2014

2. Conduct an analysis of the risks involved in this project by considering at least three scenarios

Exhibit 1: Projected subscribers (in '000s) and cash flows ( 000) 2019 2020 2021 2017 Year 2018 400 600 Subscribers 100 200 800 Cash Flows 6,000 12,000 24,000 36,000 48,000