The Coles (OP) considers an investment project. The table below sets out the details of the project:

Annual sales	15m
Annual variable costs	5m
Annual fixed costs	2m
Annual depreciation	1m
Investment cost	50m
Working capital	30% of annual sales
The beta of the future cash flow	1.3
The duration of the project	Ten years

The risk-free interest rate is 3%, and the average return of the market index is 7%. The corporate and investor tax rates are zero. The RA Co currently has a debt/equity ratio of 1 and a weighted average cost of capital (WACC) of 7%.

1. What is the cost of capital of the investment?

(5 marks)

2. Estimate the cost of the working capital investment.

(10 marks)

3. Estimate the net present value of the project. Is the project desirable?

(15 marks)

4. Carry out a sensitivity analysis with a plus/minus 10% change in the quantity of goods/services sold during the projects lifespan. Interpret the output of the sensitivity analysis.

(10 marks)

5. Discuss the concepts of competitive advantage and economic rent and how they could help decide to go ahead with the project.

(10 marks)