MGC is a private golf club that has seen a reduction in its membership over the past few years. In an attempt to attract new members and retain existing members, the golf club committee is considering building a golf driving range and an indoor swimming pool. The project would require an initial expenditure of $600,000. The club has agreed to sell the driving range and swimming pool for $30,000 at the end of 5 years. The expenditure will qualify for tax depreciation. The committee commissioned a market research survey at a cost of $40,000. The survey estimated the increase in members from current levels as a result of the project. The results were as follows: Increase in members Probability 1,000 030 700 050 500 020 It is believed that the number of members will remain the same for the life of the project. The contribution earned on membership fees received will be 55% of fee revenue in all years. The following operating costs and revenues are expected for each year of the project. Their values for Year 1 are: Membership fee income $800 per member (payable at the end of each year) Project specific overheads $120,000 (this figure does not include depreciation) An inflation rate of 4% per annum will apply to these revenues and costs from Year 2 and for the remainder of the project. The clubs accountants have provided the following information: Tax depreciation: 25% reducing balance per annum with a balancing adjustment in the year of disposal. Taxation rate: 30% of taxable profits. Half of the tax is payable in the year in which it arises, the balance is paid in the following year. Any losses resulting from this investment can be set against profits made by the companys other business activities. The club uses a post-tax money cost of capital of 12% per annum to evaluate projects of this type. Required: (a) (i) Evaluate the proposed expansion from a financial perspective. You should use net present value as the basis of your evaluation and show your workings in $000. (ii) Explain TWO non-financial factors that the club should consider before making a final decision. (b) Calculate the internal rate of return (IRR) of the project. (c) (i) Calculate MGCs real cost of capital. (ii) Explain the way in which the real cost of capital may be used to calculate the net present value of a project when the cash flows are subject to inflation. Your answer should consider the potential difficulties in using this method when taxation is involved in the project appraisal