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$]$