Question 3

The management of QSR plc are investigating an investment opportunity and the following information relates to this.

An initial investment of 100,000 (year 0) will be required immediately for a project to expand one of the companys bestselling products. This investment will be in production assets that will be sold for 8,000 at the end of the projects 4-year time horizon.

The products unit selling price is 48 and unit variable cost is 16.Annual incremental fixed overheads will be 20,000. A year 0 working capital investment of 16000 will be required. This will rise to 20,000 during the projects second year. Assume all working capital will be returned to cash at the end of year 4.

The company had spent 40,000 on market research, which forecasts the additional sales volumes expected for the next 4 years as follows:

Year	1	2	3	4
Sales (in units)	3100	3400	3700	2900

The company will obtain a 6% bank loan of 116,000 to finance the projects new machinery and the initial working capital requirements. The cost of capital relevant to such new investments is 8%.

Required:

1. Determine the relevant cash flows for the above proposal and compute the net present value of the proposals [20 marks]
2. Discuss the concept of relevance applicable to above proposal. Illustrate your answer with examples from the proposal. [15 marks]
3. Advice QSR plc on the above proposal. State and explain five other factors that may need to be considered before a final decision is made.[15marks] [Total 50 marks]