Alpha plc is considering whether to undertake a project to make electric scooters. A recent feasibility study which costs the company 150,000 suggests that the electric scooters could be sold for 150 per unit, generating sales of about 180,000 units in each of the next 5 years. The Directors have prepared a statement of other costs associated with the project as follows: 1. Wages of five hours per unit at 10 per hour. 2. Material of three kilograms per unit at 20 per kilogram. 3. The new division would occupy an existing factory for which the company has no other use but has to pay an annual rent of 450,000. The company still has to pay the rent on the existing lease even if the project would not go ahead. 4. Manufacture of the new product would require an up-front hardware development cost of 10 million. It also requires a machine costing 15 million which will be depreciated over the next 5 years and will be sold for 1 million at the end of five years. 5. It is estimated that 70% of customers that purchase an electric scooter will also purchase a helmet sold by Alpha plc. Each helmet is sold for 60 per unit and costs 30 to produce. 6. Changes in working capital requirements: Cash increases by 5% of the change in sales; inventory increases by 10% of the change in sales; trade receivables increase by 7% of the change in sales; while trade payables are not affected by changes in sales. (Hint: Working capital will be required at the end of year 1 and will be released at the end of year 6). 7. All revenues and expenses are paid in cash in the year they incur. 8. For simplicity, assume there is no corporate tax. Requirements: a. Suppose the cost of capital for the project is 14%. Calculate the Net Present Value (NPV) of the project. (20 marks) b. What are the additional factors (besides the NPV) Alpha needs to take into consideration before deciding whether to accept or reject this investment? (10 marks) c. The number of scooters that Alpha can sell depends on how well the UK economy does over the next few years. If the economy does well which occurs with 50% probability, 300,000 scooters will be sold in each of the next 5 years. If the economy performs poorly, 50,000 scooters will be sold in each of the next 5 years. Other inputs (e.g., selling price, product costs, net working capital etc.) do not depend on the state of the economy. What are the expected dollar returns and dollar return volatility of this project? (10 marks)