Task $1$

A tourist company is planning to open a new hotel. The company is willing to set aside $$30$ million on the project, out of which $$25$ million will be allocated for the purchase of new fixed assets and $$5$ million will constitute the initial net working capital. The hotel and its equipment will be depreciated over five years $($using straight$-$line depreciation$).$ The estimated cost of the invested capital is $10\%$ per year, with the risk$-$free rate being half of that. It is assumed that:

in its first year the investment will bring $$30$ million in sales revenue which in the next two years will grow at an annual rate of $10\%$; in the third year it will reach a fixed level,

in a hotel business the rate of operating expenses without depreciation generally does not exceed $70\%$ of the sales revenue,

the applicable rate of income tax is $19\%,$

the average net working capital per year required in a hotel business equals $10\%$ of the sales.

Based on the above assumptions evaluate the economic effectiveness of the investment project:

Measure the free cash flow for each year of the project utilisation period $($prepare a financial plan of the project in a tabular form$),$

Calculate the investment performance indicators, such as: Payback Period, Accounting Rate of Return, Net Present Value, Internal Rate of Return and Modified Internal Rate of Return,

Interpret the results and make the best investment decision.

$6$