If option 2 is chosen, it will be funded by one of the following methods: 0 A 15-year commercial loan taken out in Jesco $ at 11% per annum interest, capital repayable at the end of the term; A 15-year interest-free, non-repayable Miraco $ government loan, but for the duration of the loan the Miraco government would take a "dividend" each year equivalent to 21% of the profits earned in Miraco; (ii) Required: (a) Calculate the net present value (NPV) in Jesco $ for the two alternative investments, using the cash flows and discount rates given in the scenario (17 marks) (6) Assume you are the Financial Manager for APITT. Prepare a report to the Chief Executive evaluating the investment decision and its funding. Your report should include the following sections: (0) An evaluation of the two investments, including discussion of the key risk factors APITT should consider, the choice of discount rates used in the evaluation, and the real option features that are implied in the two investments. Discuss how these option features might impact on the investment decision being made. (14 marks) (ii) A discussion of the advantages and disadvantages of the methods of funding outlined in the scenario for option 2. Use appropriate calculations, where possible, to support your arguments. (11 marks) (iii) Recommendations about the choice of investment alternative and, if relevant, the method of funding. (5 marks) (Total for part (b) = 30 marks) Additional marks for structure and presentation. (3 marks) (Total for Question One = 50 marks) 3 If option 2 is chosen, it will be funded by one of the following methods: 0 A 15-year commercial loan taken out in Jesco $ at 11% per annum interest, capital repayable at the end of the term; A 15-year interest-free, non-repayable Miraco $ government loan, but for the duration of the loan the Miraco government would take a "dividend" each year equivalent to 21% of the profits earned in Miraco; (ii) Required: (a) Calculate the net present value (NPV) in Jesco $ for the two alternative investments, using the cash flows and discount rates given in the scenario (17 marks) (6) Assume you are the Financial Manager for APITT. Prepare a report to the Chief Executive evaluating the investment decision and its funding. Your report should include the following sections: (0) An evaluation of the two investments, including discussion of the key risk factors APITT should consider, the choice of discount rates used in the evaluation, and the real option features that are implied in the two investments. Discuss how these option features might impact on the investment decision being made. (14 marks) (ii) A discussion of the advantages and disadvantages of the methods of funding outlined in the scenario for option 2. Use appropriate calculations, where possible, to support your arguments. (11 marks) (iii) Recommendations about the choice of investment alternative and, if relevant, the method of funding. (5 marks) (Total for part (b) = 30 marks) Additional marks for structure and presentation. (3 marks) (Total for Question One = 50 marks) 3
