The draft financial statements of Capella Leisure Ltd for the most recent year are as follows: Draft statement of financial position (balance sheet) as at 31 January Year 0 000 Non-current assets (at written down values) Premises 2,110 Tour coaches 174 Fixtures and fittings 85 Dry slope matting 340 2,709 Current assets Inventories of hire equipment 60 Other inventories 15 Cash in hand 3 78 Total assets 2,787 Equity 0.50 ordinary shares issued 300 Retained profit 1,176 1,476 Non-current liabilities 6% Loan notes (secured on premises) 800 Current liabilities Bank overdraft 5 Trade payables 182 Other payables including customer deposits 324 511 Total equity and liabilities 2,787 Draft income statement for the year ended 31 January Year 0 000 Sales revenue 7,350 Cost of sales (3,790) Gross profit 3,560 Less: Selling and distribution expenses (1,424) Administration expenses (1,652) Operating profit 484 Finance expenses (48) Profit for the year 436 The company has forecast that it will achieve an 8 per cent increase in total sales during the forthcoming year. (This forecast does not include the effect on sales of any new ventures undertaken during the year.) However, past experience has shown that achieving the forecast is no easy task and that much will depend on the state of the economy. Skiing holidays tend to be sensitive to general economic conditions and so actual total sales could be as much as 10 per cent higher or lower than the forecast figure. The company must replace existing non-current assets at a cost of around 240,000 per year for sales up to the forecast figure and will incur further costs of 200,000 for additional tour buses if total sales turn out to be higher than the forecast figure. It is estimated that 30 per cent of the total operating expenses (i.e. cost of sales, selling and distribution expenses and administration expenses) of the business are variable and that 70 per cent are fixed. The fixed cost expense element includes depreciation charges of 260,000 for the year to 31 January Year 0 and this will remain unchanged in the forthcoming year providing actual sales are not higher than forecast. (This figure takes account of the depreciation of replacement non-current assets mentioned above.) However, if sales are higher, an additional depreciation charge of 25,000 will be required to take account of the purchase of new tour buses. The dry ski slope centre was purchased by Capella Leisure Ltd 10 years ago from a business in financial difficulties. The centre was in poor condition when first acquired and the company invested heavily in new equipment and facilities. This investment has yielded benefits and the main ski slope is now reaching the point where it is unable to cope with the volume of visitors at peak times. In recent years, the growing popularity of snowboarding has led to an increase in demand for dry slopes and snowboarders now account for 35 per cent of the total number of visitors to the centre. At present, snowboarders are accommodated on the main slope on particular days and times. However, the company is considering building a new slope that will be dedicated to this new sport. This will allow snowboarders much greater access to the centre. To date, the company has incurred 25,000 in market research and surveyors fees to investigate the feasibility of building the new slope. The dry slope centre is built on land that has been leased from a local farmer. All of this land is currently being utilised to accommodate the centre, which consists of a main slope, two beginners slopes, a bar, a clubroom and workshop facilities. However, the farmer has agreed to lease further land to the company, which adjoins the existing land being leased, for an eight-year period. At the end of this period, the farmer intends to sell the land to the highest bidder. Although the land available for leasing already has a hill, it does not have the right gradient for a dry slope and so some construction work would be required. Once the construction work is complete, the hill must be covered in plastic matting for snowboarding and a water sprinkling system installed, both for lubrication purposes and to help protect the matting. The land is awkwardly situated and so a new access road and additional car parking facilities would be required. The existing slopes at the centre use plastic matting that was first developed in the 1960s. Although many dry ski slope centres continue to use this form of matting, it is not popular with visitors as it provides a hard landing for those who fall. If a new slope is built, a more recently developed form of matting, which is made of a new type of plastic and laid upon foam, will be used as it provides a much softer landing. The supplier of this new form of matting claims that it will have to be renewed after three to five years. Capella Leisure Ltd investigated these claims and found that two dry ski slope centres in Ireland, which were among the first to use this new form of matting, renewed the matting at the end of four years. The following set-up costs for the new slope have been estimated for the forthcoming financial year ending on 31 January (Year 1): Plastic matting 355,000 Water sprinkler system for the matting 82,000 Chair lifts 106,000 Alterations to gradient of land 174,000 Construction of access road and drainage 165,000 Additional car parking facilities 75,000 All the above costs will have to be paid at the end of January Year 1 and the figures shown represent the best estimates that can be obtained. However, the surveyors have warned that there may be problems relating to drainage of the land and that this could add a further 70,000 to the construction bill. Any drainage problems that exist will not be fully identified until construction begins. The new car parking facilities that have been planned will be sufficient to accommodate 30,000 extra visitors to the centre each year. If more visitors than this figure are expected, further car parking will be required at a cost of 30,000. The new type of plastic matting that is to be used on the slope is available from only one supplier, which is based in Scotland. Although the supplier has stated that it should be able to deliver the matting when required, it is currently working to full capacity and its order book is full. Capella Leisure Ltd is concerned that, if a firm order is placed, a delivery date will be offered that is unacceptable. If the supplier cannot deliver on time, another supplier based in the US can provide ski slope matting, which is broadly similar to the matting required, for $600,000 and prompt delivery is guaranteed. However, this matting will only last for 23 years and is regarded by the company as a less attractive option. When the time comes to replace the matting, it would be possible to use the supplier based in Scotland as delivery dates would not be so critical and the purchase could be planned further in advance. Work on the new slope will only commence after planning permission has been obtained. Although no formal planning application has yet been submitted, there have been preliminary discussions with the planning department of the local council. These discussions indicated strong support for the proposal within the council, which suggested that planning permission would be granted. However, in the unlikely event that the planning committee, which will make the final decision, raises objections to certain aspects of the proposal, modifications to the plans may have to be made. This could lead to a delay of up to one month in obtaining planning permission. Although it is difficult to predict what modifications the planning committee may require, the maximum cost of making modifications is estimated to be 10,000. Assuming that there are no objections to the planning proposals and the construction work proceeds smoothly, the new slope is expected to open on the first day of the financial year after next (that is, 1 February Year 2). However, the surveyor has warned that, if there are drainage problems, a delay of two months in completing the construction work is likely to occur. This delay is in addition to any delay in obtaining planning permission and would represent a real setback for the company. Demand for the ski slope is highly seasonal as skiers often wish to practise their skills immediately before a ski holiday taken in the winter months. As a result, the early months of each calendar year are very popular. The following table, based on information collected by the company over the past five years, shows the percentage of the total annual visitors using the centre each month: Required: (a) Evaluate the investment proposal in accordance with the requirements of Alhena Holidays plc and provide a preliminary recommendation concerning acceptance or rejection of the project. For the optimistic, pessimistic and most likely scenarios, calculate the expected profit or loss for the year ended 31 January Year 1 and prepare a projected cash flow statement for the year ended 31 January Year 1 to show the amount of funding to be raised from external sources.