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.