Mancrester United plc is a major company in the hospitality sector.It has been considering the building of a new stand at its football ground and it recently commissioned a firm of market consultants to carry out research at a cost of 170,000. The research company has estimated that the stand will have a life of fifteen years.

You have been hired as an investment analyst to evaluate the viability of building the new stand and to recommend whether Mancrester United plc should proceed with the project. You have also ascertained the following:

1. The present stand will be demolished immediately at a cost of 25m. The new stand will take one year to build and the company has negotiated with the building company to pay 150m at the end of year 2 and year 3. Ie 300m in total. Mancrester United plc has a policy of depreciating Building costs in its accounts at the rate of 10% per annum on a straight-line basis.
2. The capacity of the stadium will increase from 75,000 to 85,000 as a result of building the new stand. The stadium is always in full demand and Mancrester United has on average 25 home games per season and a ticket for each home game costs each patron 60.The increased capacity will commence from the start of year 2.
3. Insurance costs at the stadium are 1m per annum presently. These costs will not vary over the course of the next fifteen years whether or not the new stand is built.
4. To reduce the cost of the stand, Mancrester United plc has the opportunity of selling a senior player, Ashley Hughes, immediately for 40m. If the player is not sold now, Mancrester United plc will receive 10m in year 5.
5. The new stand will have 20 corporate boxes compared to 5 corporate boxes in the current stand. Each corporate box is rented to patrons at a cost of 750,000 per annum. This extra income will commence from the start of year 2 and present corporate box holders will continue paying during construction of the new stand.
6. Extra catering facilities will contribute 8m per annum once the stand has been opened at the start of year 2.
7. All security staff associated with the present stand will be made redundant immediately at a cost of 2m. Greatly reduced security costs specific to the new stand will recommence at the start of year 2. These costs will total 150,000 annually.
8. Merchandising revenue from new retail outlets in the new stand is estimated to be 5m per annum from start of year 2. Associated costs from the new retail units will be 2.5m per annum from start of year 2. There are no retail outlets in the present stand.
9. Miscellaneous revenue from concerts will commence from the start of year 2 for four consecutive year. Net income will be 1m per annum.
10. Taxation may be ignored.
11. Calculations should be made to the nearest '000.
12. Mancrester United plc has a policy of requiring all projects to payback within a nine year period.

Required

Calculate the relevant cash flows to be used in evaluating the project.

Calculate the Payback Period.

Calculate the Net Present Value (NPV) if cost of capital for Mancrester United plc is 10%. Calculate also the Internal Rate of Return (IRR) for the Project. (Hint use 15% discount factor)

Draft a brief report for the management of Trade plc, advising if it should proceed with the project and specifying the reasons for your decision.

Apart from the calculations above, suggest two non-financial factors that Trade plc should consider before proceeding with the project.