Bousetta (Property Developers) Ltd intends to bid at an auction, to be held today, for a

manor house that has fallen into disrepair. The auctioneer believes that the manor house

will be sold for about 550,000. The business wishes to renovate the property and divide

it into flats to be sold for 200,000 each. The renovation will be in two stages and will

cover a two-year period. Stage 1 will cover the first year of the project. It will cost

600,000 and the six flats completed during this stage are expected to be sold for a total

of 1,200,000 at the end of the first year. Stage 2 will cover the second year of the

project. It will cost 450,000 and the three remaining flats are expected to be sold at the

end of the second year for a total of 600,000.

The cost of renovation is subject to a binding agreement with local builders if the manor

house is acquired. There is, however, some uncertainty over the remaining input values.

The business estimates its cost of capital at 12 per cent a year.

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