Global, Spanish and First plc (GSF) is a large transportation company with head quarters (HQ) in Spain. As is usual with large infrastructure procurements, GSF, like other corporate firms in the industry, generates sales by competitive tenders. GSF, being a European Commission-accredited firm, has decided to bid, via a tender contract, to commence the groundwork for a 600-mile motorway in the Eurupean Union.

You have received the following email from the Chief Financial Officer (CFO), Stefan Hermann.

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Mr. John Li,

Financial Management Analyst

GSF-London Office.

12th November 20X6

Dear John,

I would like you to work on our transportation tender invitation to help with the detailed computations and report. Please bear in mind that the project will last two years, starting in January 20X7. The European Commmission (EC) have advised that the payments will be split in two, with one advance payment in early January 20X7 and the rest in early January 20X9. The financial accountant and management accountant will help you with internal estimates and costs. For scheduling the labour hours and contracts, please liaise with Human Resources (HR).

Please prepare a report, with supporting calculations, to advise the senior management on whether we should submit a bid in this tender process to the EC. While we have been employing a cost of capital of 10% per annum to appraise our investments, you may want to re-compute the weighted average cost of capital.

Yours sincerely,

Stefan Hermann, CFO

GSF, London.

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The financial and management accountants have together with HR prepared some information and estimates to aid in your decision:

1. The two-part payment from the EC, the CFO mentioned are 2.9 million now and the rest later.

2. Any capital expenditures for this project will attract capital allowances at the rate of 18% per annum, reducing balance in the year of the expenditure and every subsequent year except the year of disposal. In the disposal year, there will be either a balancing charge or a balancing allowance.

3. All material and labour costs are stated in December 20X6 value. The estimated level of inflation is 2% p.a. in 20X7 and 3% p.a. in 20X8.

4. Unless otherwise stated, you can assume that all cash flows occur at the end of the year in question.

5. Corporation tax rate is 17% p.a. and is payable in the same year to which the investment or cost relates.

6. Materials to be employed on the project would cost 820,000 (20X7) and 930,000 (20X8).

7. GSF will need to transfer 20 highly skilled employees from other sites, for the last 18 months of the project (i.e., from July 20X7).

The current average annual wage of these employees is 23,000 but they will each be paid a bonus of 15% p.a. more for working on this project. They will be replaced, at their existing sites by new workers, who, because of their lack of experience, will receive an average annual wage of 19,000.

8. In addition to the transfer of skilled workers, GSF will need to hire 45 new workers at a total cost of 830,000 per annum for both years.

9. GSF will also need to hire new site management staff for the duration of the project at an average annual total cost of 420,000.

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Concerned about the operational implications of accepting this project, the Chief Operations Officer (COO) send you some information.

He had been planning to dispose of the large earth moving machine in December 20X6 about which he has the following information:

1. To aid in the groundwork, GSF will need this earth moving machine.

2. It had cost 3.2 million when initially bought in 20X4 but since it is currently under-utilised, GSF had been planning to sell it.

GSF has received a firm-commitment offer of 1.1 million from Anglia First Bus plc., a UK based transportation firm.

3. The COO says he has been briefed by the management accountant that if employed on the transportation project, the machine could be sold for 200,000 by the end of the project.

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GSF management are aware that this will be a very competitive bidding process. At the company's most recent board meeting, the directors agreed that a total tender price of 8.1 million would be reasonable. However, it was also agreed that, if there was danger of GSF being outbid, a lower price would be considered if the "numbers added up".

At a recent lunch meeting at which you were present you heard the CFO telling the COO that if GSF was successful with this bid, there is the possibility GSF might be asked to tender again for further contracts, which are likely to be within the European Union or allied nations. However, you heard the Chairman of the Board and one of the non-executive directors express caution on the grounds that GSF had not previously invested abroad and had no senior management expertise of that nature.

You have done research and analysis of GSF, its stock prices and the stock market. You estimated some information:

1. You have estimated the beta of GSF to be 1.3.

2. The 91-day Treasury bill with face value of 1,000 has been trading, on average, at 995.0616 for some weeks.

3. You decide to employ the 364-day count for the calendar year.

4. The average annual return on the Madrid Stock Exchange is 7%.

5. Deputy CFO, Janine Holt, confirmed the firm employs only equity capital and has no debt.

REQUIRED:

1. Reply to the CFO, compiling a suitable report with supporting calculations, as to whether tendering for a total price of {Final} million would be in shareholders' interests and, in particular, compute the Net Present Value (NPV).

2. In your report, include the minimum total bid price to breakeven in NPV (i.e., NPV = 0).

3. Advise the CFO of the risks (excluding foreign exchange risk) of GSF invested abroad.

Net Cash Flows and Associated Numbers

Enter the following details of your computation:

Net Cash Flow in 20_X6

Answer for part 1 and coordinate 1

Net Cash Flow in 20_X7

Answer for part 1 and coordinate 2

Net Cash Flow in 20_X8

Answer for part 1 and coordinate 3

Net Cash Flow in 20_X9

Answer for part 1 and coordinate 4

Tax Saved on the WDA of 20_X6 (not the WDA)

Answer for part 1 and coordinate 5

Tax Saved on the WDA of 20_X7 (not the WDA)

Answer for part 1 and coordinate 6

Tax Saved on the Balancing Allowance from the Machine Sale in 20_X8 (Not the Balancing Allowance)

Answer for part 1 and coordinate 7

Tax Saved on the Total Expense of Materials and Labour for 20_X7

Answer for part 1 and coordinate 8

Tax Saved on the Total Expense of Materials and Labour for 20_X8

Answer for part 1 and coordinate 9

Materials Expense of 20_X7 in Money Terms (i.e., not Real Terms)

Answer for part 1 and coordinate 10

Total Wages Expense of 20_X7 in Money Terms (i.e., not Real Terms)

Answer for part 1 and coordinate 11

Materials Expense of 20_X8 in Money Terms (i.e., not Real Terms)

Answer for part 1 and coordinate 12

Total Wages Expense of 20_X8 in Money Terms (i.e., not Real Terms)

Answer for part 1 and coordinate 13

Corporate Tax Payable on the Contract Price Advance in 20_X6

Answer for part 1 and coordinate 14

Corporate Tax Payable on the Contract Price Final in 20_X8

Answer for part 1 and coordinate 15

Net Present Value and Break Even Numbers

Enter the following results from your computations for calculating Net Present Value (NPV) and Break Even NPV

Risk Free Rate

Answer for part 2 and coordinate 1

Cost of Capital

Answer for part 2 and coordinate 2

NPV

Answer for part 2 and coordinate 3

How much can income reduce by in 20_X8 but NPV still achieves break-even?

Answer for part 2 and coordinate 4

What must the total income in 20_X8 be, for NPV to break-even?

Answer for part 2 and coordinate 5

What total contract price is required for NPV to break even?

Answer for part 2 and coordinate 6