The CFO of Expansion Group Ltd$.$ has been presented with an opportunity to undertake a $7-$year project in Turkey. As an emerging market, some incentives are available for foreign direct investment $($FDI$)$ in the country and she would like to evaluate this proposal.

The following data is available for the evaluation of the project:

The project investment is expected to cost $3,500,000,$ payable at the start of the project. Of this amount, $3,000,000$ is a capital investment, with the remainder required for set up costs and other project related expenses. $($Ignore depreciation for the purpose of this exercise.$)$

The after$-$tax cash inflows have been estimated at $800,000$ per year for the duration of the project. An opportunity cost of expansion in the UK has been identified and valued at $725,000.$

Costs for a visit to Turkey to evaluate the location and for meetings with the Turkish investment authority $($ISPAT$)$ have been recorded as $50,000.$

The company is publicly traded and the $\backslash$beta eta of its stock is $1\mathrm{.}2.$ The risk$-$free rate is $2\%$ and the market rate of return is $6\mathrm{.}5\%.$

The relevant tax rate for the duration of the project is $20\%($discount for FDI$)$ and, under the conditions of the tax incentives, the company would be required to create a limited company in Turkey and operate there for a minimum of three years from the beginning of the project.

Expansion Group Ltd$.$ has sufficient retained earnings to fund the project. The CFO believes this project should be $100\%$ funded with retained earnings, but no final decision has been made.

a$)$ Determine the relevant cash flows to be used in the investment evaluation.

b$)$ Calculate the Net Present Value $($NPV$)$ for the investment proposal and advise the CFO whether this project should be undertaken. $($HINT: You will need to use the Capital Asset Pricing Model $($CAPM$)$ to determine the company$$s required rate of return for the project.$)$

c$)$ Critically evaluate the choice of funds that the CFO wishes to use against other possible options and critically discuss any other issues that are applicable in this scenario.