James Kirk is planning to set up an on-line dating agency for the over 50s who have been out of the dating scene for a while.

To fund this venture, he has 90,000 which he inherited from his father who passed away earlier this year. However, the initial set up costs and the necessary working capital are likely to be more than the 90,000. Mr Spock, one of James closest friends, has shown an interest in this venture and can invest up to 60,000.

The Lloyds bank has also agreed to provide James with a 60,000 five-year interest-only business loan at 8.3% per year should he opt to take up a loan. This means James will only pay the bank the interest on the loan every month during the five-year period. The loan capital will have to be repaid in full at the end of the 5^th year.

A market survey carried out earlier this month showed that the number of members likely to join his dating website is 790 in the first year. However, through extensive advertising, the membership numbers are expected to increase by 40% in the following year and then grow by around 15% each year for the following three years.

The following information is relevant:

The annual membership fee in the first year is 180, and is set to increase by 10% per year in each of the following four years.

Estimated development and set-up costs of the internet dating site are as follows:

Software development 62,000

Hardware 41,600

Legal fees 7,520

Pre-launch advertising 28,000

------------

Total up-front costs 139,120

=======

It is anticipated that there will be a need to upgrade the hardware in year three, costing 27,200.

The annual fixed running costs in the first year are estimated as follows:

Premises costs 28,740

Staff costs 96,300

Advertising 18,000

Annual Reg fees with regulatory authorities 2,600

------------

Total 145,640

Additional information:

a) The annual premises costs occur evenly throughout the year and are paid for each month. These costs are expected to increase by 4.8% per year.

b) The staff costs occur evenly throughout the year and are paid for in the month they occur. These costs are expected to increase by 3.5% per year.

c) The advertising costs are expected to increase by 20% per year. In each year, 20% of the advertising budget is spent in January, 15% in March, 15% in May, 25% in July, 10% in September and the remaining budget in November. These costs are paid for in the month following the expenditure.

d) Annual registration fee is paid at the start of each year and is expected to increase by 5% each year.

e) The cost of capital is 9%.

f) Ignore all taxation implications throughout

1. Produce a 12-monthly cash budget for the first year of the business. (You may assume that demand will occur evenly throughout the year.)

(20 marks)

1. Suggest, in general, how businesses can deal with cash short-term cash shortages.

(5 marks)

1. Calculate the following for the first year only of the business. Ignore depreciation and amortisation of assets.

1. Profit for the year (7 marks)
2. BEP (5 marks)
3. Margin of safety expressed as % (3 marks)

(15 marks)

1. Assuming this is a five-year project and ignoring all taxation implications, Calculate the following:

1. The net present value (20 marks)
2. The payback period (5 marks)