PAC is a delivery company that has been making losses in recent years in a very competitive market. PAC is now considering a project to purchase $10$ new electric delivery vehicles to replace older diesel delivery vehicles.

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Option A $$ a bank loan for the full $3200000,$ at an interest rate of $11\%$ per year.

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Option B $$ a funding package from a range of sources. The details are shown below.

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Option B $$ Interest rate$/$

Expected return

Debenture

Bank loan

Redeemable preference shares

Ordinary shares $300000$

$200000$

$40000$

$10000015\%$

$12\%$

$7\%$

$5\%$

Total $640000$

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Required

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$($a$)$ Calculate the weighted average cost of capital for Option B$.$

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$($b$)$ Identify which of the two options, A or B$,$ would be the best to finance the project,

giving a reason for your answer.

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The following information is available.

$$ The total initial costs involved in buying the $10$ new delivery vehicles are $640000$

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$$ In Year $1,$ each delivery vehicle will make $50$ deliveries per day, charging customers

$2\mathrm{.}50$ per delivery.

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$$ In both Year $2$ and Year $3,$ each delivery vehicle will make $65$ deliveries per day, charging customers $3\mathrm{.}00$ per delivery.

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$$ In both Year $4$ and Year $5,$ each delivery vehicle will make $80$ deliveries per day, charging customers $3\mathrm{.}50$ per delivery.

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$$ In all Years $1$ to $5,$ drivers will be paid $50$ pence $(0\mathrm{.}50)$ per delivery.

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$$ In both Year $1$ and Year $2,$ other running costs $($including depreciation$)$ will be

$8000$ a week.

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$$ In both Year $3$ and Year $4,$ other running costs $($including depreciation$)$ will be

$9000$ a week.

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$$ In Year $5,$ other running costs $($including depreciation$)$ will be $10000$ a week per delivery vehicle.

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$$ On the last day of Year $5,$ all the delivery vehicles will be sold for a total of

$50000$

$$ Depreciation per year will be $118000$

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$$ The delivery vehicles will be operated for $6$ days per week, for $50$ weeks a year.

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Required

$($c$)$ Calculate the net cash flow for each of the $5$ years of the project.

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$($d$)$ Calculate the payback period of the project.

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Required

$($e$)$ Calculate the net present value of the project at the end of Year $5.$