Project Finance

Assignment Three

Question One

a$)$ A retailer is considering opening a new store as a business venture. The purchase price of the store will be $2$ million and there will be a further investment required of $0\mathrm{.}5$ million $6$ months after purchase.

The store will open $12$ months after purchase. Revenues less running costs are expected to occur continuously and will be $0\mathrm{.}2$ million in the first year of operation, $0\mathrm{.}25$ million in the second year of operation and thereafter increasing at yearly intervals by $4\%$ per annum compound.

Eight years after purchase, a major refit costing $0\mathrm{.}8$ million will be required. Fifteen years after purchase, it is assumed that the store will be closed and sold for $6\mathrm{.}4$ million.

The retailer requires a rate of return on its investment of $10\%$ per annum effective.

i$)$ Calculate the net present value of the venture.

$[8$ marks$]$

It is now assumed that the revenue less running costs will be received mid$-$way through each year, rather than continuously.

ii$)$ Explain how your answer to part $($i$)$ would change.

$[2$ marks$]$

b$)$ A loan is to be repaid by an increasing annuity. The first payment will be $100$ and the payments will increase by $50$ per annum. Payments will be made annually in arrear for ten years. The repayments are calculated using a rate of interest of $5\%$ per annum effective.

i$)$ Calculate the amount of the loan. $[2$ marks$]$

ii$)$ Calculate:

the interest component of the sixth instalment.

Project Finance

Assignment Three

Question One

a$)$ A retailer is considering opening a new store as a business venture. The purchase price of the store will be $2$ million and there will be a further investment required of $0\mathrm{.}5$ million $6$ months after purchase.

The store will open $12$ months after purchase. Revenues less running costs are expected to occur continuously and will be $0\mathrm{.}2$ million in the first year of operation, $0\mathrm{.}25$ million in the second year of operation and thereafter increasing at yearly intervals by $4\%$ per annum compound.

Eight years after purchase, a major refit costing $0\mathrm{.}8$ million will be required. Fifteen years after purchase, it is assumed that the store will be closed and sold for $6\mathrm{.}4$ million.

The retailer requires a rate of return on its investment of $10\%$ per annum effective.

i$)$ Calculate the net present value of the venture.

$[8$ marks$]$

It is now assumed that the revenue less running costs will be received mid$-$way through each year, rather than continuously.

ii$)$ Explain how your answer to part $($i$)$ would change.

$[2$ marks$]$

b$)$ A loan is to be repaid by an increasing annuity. The first payment will be $100$ and the payments will increase by $50$ per annum. Payments will be made annually in arrear for ten years. The repayments are calculated using a rate of interest of $5\%$ per annum effective.

i$)$ Calculate the amount of the loan. $[2$ marks$]$

ii$)$ Calculate:

the interest component of the sixth instalment.

the capital component of the sixth instalment.

$[5$ marks$]$

Immediately after the sixth instalment, the borrower asks to repay the remaining loan using level annual instalments. The lender agrees, but changes the interest rate at the time of the alteration to $6\%$ per annum effective.

iii$)$ Calculate the revised instalment.

$[3$ marks$]$