Scooby plc (Scooby) is a UK based company which wishes to expand some of its operations overseas to take advantage of developing markets. The proposal is to create a manufacturing base in the country of Ditz, this investment has a planning horizon of 4 years.

The initial investment requirements are D$39m, for Property, Plant and Equipment of D$36m and working capital of D$3m. It is forecast that there will be no further injections of working capital required during the life of the project and that working capital will be released at the end of Year 4. You are to ignore capital allowances.

Plant and Equipment is forecast to have zero residual value in year 4 but property is expected to be worth D$12m at year 4 values.

Production and sales are expected to be 800,000 units in the first year, rising to 1,200,000 in years 2 and 3 and 4.

At current prices, the selling price per unit is D$25 and the cost per unit is D$12. Costs are estimated to increase at 7% per annum, sales prices are forecast to increase by 5% per annum.

Corporation tax is 25% in both the UK and Ditz. A bi-lateral tax treaty exists between the two countries which permits offset of overseas tax against any tax liabilities. Taxes are payable in the year in which the tax liability arises.

Other Information:

i)	Ditz can borrow funds for the investment at 6.5% per year (pre-tax).
ii)	Ditz cost of equity capital is estimated to be 10.5%
iii)	After the proposed investment Ditzs gearing will be: 60% debt: 40% equity by book value 28% debt: 72% equity by market value

The inflation rates of the two countries are expected to be as follows:

UK	5%	It can be assumed that these rates will not change for the foreseeable future.
Ditz	9%

Ditzs currency, the D$, is currently trading at D$12 per 1.

Required (for calculations you MUST show workings details):

1. Provide an estimate of the net present value of the project and advise briefly on whether or not Scoobys investment in Ditz should proceed.

2.Discuss the use of the companys Weighted Average Cost of Capital (WACC) as a discount rate in an international investment in general and as it applies to Scooby plcs above investment in Ditz

1. Why is investment appraisal not a definitive science?
2. The chief executive of the stock market-listed Persimmon, will receive the first 50 million tranche of shares next month under an incentive scheme worth a total of about 90 million at the current share price. The Times, 27 November 2017. This occurred after the UK governments Help to Buy scheme, funded at taxpayers expense, boosted the UK property market and Persimmons share price. A twofold criticism of this remuneration is that
   • it was not a consequence of managerial success but was a result of a UK government policy, Help to Buy. And secondly,
   • that the level of remuneration received by senior directors was excessive.

Required:

The above is one example of controversy which raises concerns about directors working effectively in the best interests of shareholders and the ability of remuneration policy to address agency issues.

Discuss agency theory, the issues it can present for shareholders, and the effectiveness of differing remuneration policies which can be used to align shareholders and directors interests.