Lanchester plc is an unquoted and profitable company in the leisure industry.

Its financial is as follows:

40 million ordinary shares with a market value of 270p

25million 12*o unsecured debentures, redeemable at par on 30 Junc 19X4, having a current market value of 94 ex interest

23.5 million 11o secured debentures, redeemable at par on 30 June 19X6, having a current market value of 90 ex interest.

The company has surplus funds available and the management is evaluating a 5 million investment in a golf course.

The course would take two years to construct and would have an after-tax realizable value of 6.5 million (excluding working capital) after an additional five years. 2.5 million would be needed immediately for the purchase of land. The buildings and course construction would cost 0.5m and 1m respectively, the latter payable in two installments in one and two years' time. 0.5m would be required for equipment, and 0.1m tor working capital. when the course opened.

A market research survey costing 0.1 m has indicated that the number of customers would depend on the green fees and the number of golf course in the locality. The results of the survey are summarized as follows:

Average number of customers per day if other courses have been built nearby

	0.1	0.2	0.4	0.2	0.1
Green Fees
5	397	426	490	545	584
6	310	365	415	470	506
7	205	248	298	340	390
8	103	145	199	252	301
9	30	64	91	124	159

Average number of customers per day if there are no other courses nearby

Green Fees
5	659	724	796	861	925
6	580	631	710	782	823
7	562	625	641	661	690
8	421	458	502	563	618
9	310	352	397	458	496

The probability of competitors constructing a course nearby is estimated at 0.2

Its anticipated that in addition to the green fees, customers will urchase equipment from the golf shop and buy refreshment in the bar and restaurant. The contribution per customer before tax is estimated to be 2 per day

The fixed costs of running the course are expected to be 0.5m/annum

It is company policy to use the current WACC in project appraisal

Lanchester is an unquoted company and therefore its equity beta is unknown. However, its equity beta can be estimated from that of Burnhope, which is another company in the same industry. Burnhope is financed by 80% equity and 20% debt. Half of its business has the same risk as that of lanchester. The other half is 50% more risky. The leveraged beta of Burnhope is 1.38

The return on Treasury bills is currently 10% annum. The market return is estimated to be 15% annum.

The construction work and building can be depreciated for tax purposes at 4% per year straight line and there is a 25% per year writing down allowance on a reducing balance basis for equipment.

Corporation tax is at the rate of 35% per year payable one year in arrears.

The green fees, shop sales, bar and restaurant sales, and running costs are all stated at current prices They are all expected to increase by 5% per year due to inflation. The cost of land buildings, construction, equipment, working capital and the net realizable value have already been adjusted to allow for the effects of inflation.

It is now 30 Junc 19XI, The company's financial year ends on 31 July.

You may make the following assumptions

Corporate debt is risk free

Cash flows take place at the end of each year

1. Identity the factors you would take into account in evaluating the investment
2. Advise management on whether the investment should be accepted, having considered all relevant financial and non-financial information.