Investment Decision Making. The pictures are attached to the question. 
5. XYZ plc owns two acres of derelict land in Moscow city. The firm has received an invoice for $ 100,000 from consultants who were given the task of analysis, investigation and design of some project proposals for using the land. The consultants outline the two best proposals to a meeting of the board of XYZ. Proposal 1: Proposal 1 is to spend $ 250,000 levelling the site and then constructing a six-level car park at an additional cost of $ 2,500,000. The earthmoving firm will be paid $ 250,000 on the start date and the construction firm will be paid $2,000,000 on the start date, with the balance payable 24 months later. It is expected that the car park will be fully operational as from the completion date (365 days after the earthmovers first begin). The annual income from ticket sales will be $1,000,000 to an infinite horizon. Operational costs (attendants, security, power, etc.) will be $200,000 per annum. The consultants have also apportioned $ 100,000 of XYZ's central overhead costs (created by the Moscow-based head office and the executive jet) to this project. The consultants present their analysis in terms of a commonly used measure of project viability, that of payback This investment idea is not original; XYZ investigated a similar project 2 years ago and discovered that there are some costs which have been ignored by the consultants. First, the local council will require a payment of $ 250,000 1 year after the completion of the construction for its inspection services and a trading and environmental impact license. Second, senior management will have to leave aside work on other projects, resulting in delays and reduced income from these projects amounting to $100,000 per year once the car park is operational. Also, the proposal is subject to depreciation of one-fiftieth (1/50) of the earthmoving and construction costs each year. Proposal 2: Proposal 2 is for a health club, Mercia. An experienced company will, for a total cost of $ 9m payable at the start of the project, design and construct the buildings and supply all the equipment. It will be ready for XYZ's use 1 year after construction begins. Revenue from customers will be $5m per annum and operating costs will be $4m per annum. The consultants allocate $120,000 of central general head office overhead costs for each year from the start. After 2 years of operating the health club Mercia will sell it for a total of $11m. Information not considered by the consultants for Proposal 2 The $9m investment includes $5m in buildings not subject to depreciation. It also includes $ 4m in equipment, 13% of which has to be replaced each year. This has not been included in the operating costs. A new executive will be needed to oversee the project from the start of the project, costing & 100,000 per annum. The consultants recommend that the board of accept Proposal 2 and reject Proposal 1. Assuming: (1) If the site was sold with no further work carried out it would fetch $ 250,000. (2) No inflation or tax. (3) The cost of capital for XYZ is 15% (this is the relevant rate for this project). (4) It can be assumed, for simplicity of analysis, that all cash flows occur at year ends except those occurring at the start of the project. a. To calculate the net present value, first you would have to calculate the annual net cash flows for each Proposal. Proposal 1 0 1 2 3 and after (All figures in $000s) Time (years) Ticket sales Earthmoving Construction Operational costs Senior management Council Opportunity Net cash flows Proposal 2 0 1 2 3 (All figures in $000s) Time (years) Revenue Design and construction Equipment Operational costs Executive Opportunity cost Sale of club Net cash flows b. Using the net cash flows above, calculate the net present value of the proposed projects. C. Would you recommend Proposal 1, Proposal 2 or neither of the two
