Hong Kongs Cafe de Coral announced in February 2022 that it would suspend all dine-in service at most of its 163 fast food outlets to focus on takeaways from March 1 due to the surge in Covid-19 infections.

You work for a competitor company with 180 fast food outlets and your CFO requires your help to analyse the impact of a potential strategy that the company is considering below:

• Close half of the companys outlets, particularly those with low traffic and expensive rents.
• Refurbish 30 major locations to convert them from dine-in to 100% pick-up or delivery centres.
• The company will not invest in any delivery facilities and will work with companies like Food Panda, Deliveroo, Uber Eats, etc. for delivery to customers.

You have been asked to prepare an analysis of this proposal for presentation to the board with the following assumptions:

1. Investment in the refurbishment of 30 locations amounting to $200M by the end of the current year (year 0) to be depreciated in the next 4 years (year 1 to 4).
2. Investment in technology to enhance productivity and improve the customer experience amounting to $20M, to be fully expensed in the current year (year 0).
3. Revenues assuming the COVID-19 situation lasts for another year, this model will result in a fundamental shift from dine-in to takeaway over the long term. Incremental revenues from this business model are expected to be as follows:

(in HK$million)	Year 1	Year 2	Year 3	Year 4
New take away revenue	300	310	320	350
Existing dine-in revenue replaced	260	280	285	310
Incremental revenue	40	30	35	40

4. Incremental working capital equivalent to 3% of incremental sales will be incurred.
5. Shutdown cost one-off shutdown cost from the outlet closures is estimated to be $80M this year (year 0). This includes loss of business, lease termination, staff redundancy, etc.
6. The cost of raw materials is expected to be maintained at 63% of revenues.
7. Additional take-away packaging cost is expected to be incurred for the take-away business, amounting to 2.5% of revenues.
8. The company expects net savings in staff and rental cost of $40M per year from next year due to this restructuring.
9. Marketing is requesting incremental promotional expenses of $15M per year from next year for 2 years to promote the new services. This is in addition to the existing marketing cost of $40M per year.
10. From the fifth year onwards, net incremental cashflows are expected to increase by 2% per annum.

Other information

• Tax rate is 16.5%, WACC is 9%
• The renovation will be funded by additional loans with annual interest of $10M for two years.

Required

Based on the above information, you are required to perform the following tasks:

1. Compute the NPV of the proposed strategy. (13 marks)
2. Compute the payback period of the proposed strategy. (4 marks)
3. Based on the analysis in parts a and b, should the company go ahead with the proposed strategy? Provide an explanation for your decision. (3 marks)