The company's overheads are expected to increase by the following annual

amounts as a direct result of the opening of the restaurant:

Single decker buses section

The average contribution from the single decker buses is $$2\mathrm{.}50$ per client. If the double

decker buses section is not opened it is expected that the single decker buses will sell

tickets to $1000$ clients per day in the coming year and in subsequent years, the

revenue will rise in line with passenger numbers. If the double decker buses section

is opened, the consultants expect sales from the existing single decker buses section to

initially reduce by $40\%$ in year $1$ and then to increase in line with passenger numbers.

The company's Financial Director has provided the following taxation information:

Tax depreciation: $25\%$ reducing balance per annum.

The first year's tax depreciation allowance is used against the first year's net cash

inflows.

Taxation rate: $30\%$ of taxable profits. Half of the tax is payable in the year in which it

arises, the balance is paid the following year.

Other information

NRZ company has a D:E of $1$:$1$ and Equity beta of $1\mathrm{.}5.$ Another company that is

operating double decker buses has D:E of $1$:$2$ and Equity beta of $1\mathrm{.}9.$

NRZ$\text{'}$s current weighted average cost of capital $($WACC$)$ is less than $20\%.$

Assume both NRZ and YYY a company already operating double decker buses have a

debt beta of $0\mathrm{.}2.$

All initial capital expenditure occurs at the beginning of the project. Assume all other

cash flows occur at the end of each year

Cost of debt of NRZ and YYY is $6\%$ and $7\%$ respectively.

The risk free rate of return and market rate of return are expected to be $4\mathrm{.}5\%$ and $9\mathrm{.}5\%$

respectively for the foreseeable future.Required:

$($a$)$ Calculate the Net Present Value $($NPV$)$ of the project being considered by NRZ at the

following discount rates

$($i$)$ NRZ$\text{'}$s current weighted average cost of capital $($WACC$).$

$(5$ marks$)$

$($ii$)$ A project specific risk adjusted discount rate based on the gearing of the

project.

$(10$ marks$)$

$($b$)$ Calculate the Adjusted Present Value $($APV$)$ of the project being considered by NRZ

$(7$ marks$)$

$($c$)$ Advise NRV on the appropriateness of each of the valuation methods used in $($a$)$ and $($b$)$

above to value this project

$(8$ marks$)$