Grenada. They already have five restaurants throughout the Caribbean region, which are

administered from the Head Office in Port of Spain, Trinidad. They are unsure of the

exact location, and are considering two possible sites. The project life is five $(5)$ years.

A converted loft space in the centre of the capital St$.$ Georges is available for an annual

rent of three million dollars $($$$3,000,000)$ per annum for five $(5)$ years. It has already been

used as a restaurant, so refurbishing costs will be kept to a minimum. To furnish the

eating area and bar, as well as purchase crockery, cutlery etc will cost seven million

dollars $($$$7,000,000),$ payable immediately.

A building site is available on which a new property has been erected. Costs of the total

project, including the land, are estimated at forty million dollars $($$$40,000,000).$

Furnishings and consumables will cost ten million dollars $($$$10,000,000).$ The property

has an estimated useful life of twenty$-$five $(25)$ years. Annual maintenance costs of five

hundred thousand dollars $($$$500,000)$ per annum are expected, starting at the end of the

first year of trading. A resale value of twenty$-$nine million $($$$29,000,000)$ would be

expected at the end of the project life of five $(5)$ years. The building is almost completed

and trading could commence in the same time scale as the rental above.

The rented property is smaller than the new building and is in a less prestigious area than

the capital. Market research, which cost one million dollars $($$$1,000,000),$ has indicated

that the clientele would be willing to spend two hundred and fifty dollars $($$$250)$ per head.

At the newly built property, which is larger and in a more prestigious area, research

suggests that a price of three hundred dollars $($$$300)$ per head could be expected.

The total market research findings are listed below:

Additional information

i$.$ You may assume that all cash flows, with the exception of the rent, take place at

the end of the year. Taxation may be ignored.

ii$.$ Caribbean Delight Restaurants Limited has a capital cost of twelve percent $(12\%).$

Show the cash flows and timings for each project. Explain the basis of your

calculations and write a justification for inclusion or exclusion of your figures.

Calculate the following for each of the options available to Caribbean Delight

Restaurants Limited:

Net Present Value

Internal Rate of Return

Explain which project you would choose, giving appropriate reasons.

a$.$ Discuss the issues involved in choosing an appropriate discount rate to use for

finding the present value of a proposed investment, especially in relation to

risk.

b$.$ In addition, consider other ways in which risk can be taken into account of in

relation to this question.

Explain additional assumptions you made in completing the evaluation of the

alternatives.