Question
New Customers Year: Year 1 Year 2 Year 3 Year 4 Customers: 78,000 93,500 116,500 147,400 Variable Costs Variable costs have been agreed with the
New Customers
Year: Year 1 Year 2 Year 3 Year 4
Customers: 78,000 93,500 116,500 147,400
Variable Costs
Variable costs have been agreed with the IRLFONE plc with the below bands for monthly charges for per user:
Monthly Cost | 6 | 5 | 4 | 3 |
Users | 0- 80,000 | 80,001- 95,000 | 95,001-120,000 | +120,001 |
Tax
- The local tax rate is 15% and tax is collected in the year of the relevant taxable profits.
- Capital allowances can be claimed at 25% straight line basis on the high street retail units only.
FoneMobil have confirmed the following additional information:
- FoneMobil has a contract to buy a fixed amount of airtime from EIRPHONA plc at a cost of 8m per annum.
- Working capital is required of 5% of the full investment and is needed in place at the start of the project.
- FoneMobil uses a post-tax cost of capital of 12% for all investment opportunities.
Requirement:
a) Calculate Net Present Value (NPV) for proposed investment and advise FoneMobil if they should
| proceed with this investment. | (23 marks) |
b) | Calculate the Internal Rate of Return (IRR) for this project and advise FoneMobil | (4 marks) |
c) Critically evaluate the use of selling price inflation as part of an NPV calculation, providing suitable calculations to confirm your evaluation.
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