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Q2 A company is assessing whether to carry out a long-term project. It is expecting to need 2m capital at the outset and to generate

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Q2 A company is assessing whether to carry out a long-term project. It is expecting to need 2m capital at the outset and to generate income in the first three years of 300,000, 400,000 and 700,000 respectively. Corresponding management expenses are expected to be 80 per cent, 70 per cent, and 50 per cent respectively of the income each year. The company is going to evaluate the project using a net present value (NPV) method. (a) Calculate the NPV of the project using only the first three years' income and expenses, using a discount rate of 8 per cent per annum, and stating any assumptions made. [3 marks) (b) Discuss the conclusions you would draw from your result in (a) [5 marks] (c) Explain how a risk matrix could be used in assessing the risks in the project. [2 marks] Assume that the company is going to raise the 2m capital it needs for the project by the issue of new fixed interest stock, and that it has a history of increasing the dividend on its ordinary shares steadily over the last 5 years at 2 per cent per annum (d) Discuss how the project may affect the company's future dividends. [4 marks]

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