Ujuzi and Mwingi have just completed their degree program. From their casual observations, they believe that it will be socially and economically advantageous to form a company, Ujuzi Mwingi Limited to distribute books to accounting and other students in the whole country. Ujuzi and Mwingi have obtained a firm commitment from a rich benefactor who is able and willing to provide them with necessary funds provided that they are able to convince him that the project will be a success and beneficial to the country. They have identified the following operations as critical to the success of the new business:

Own premises. They intend to purchase immediately for cash a warehouse in industrial area for Sh. 10 million and take one year to convert it into a bookstore at a cost of Sh.6 million.

Eight pick-up motor vehicles at a cost of Sh.2 million each, fully built will be acquired when the store is completed and ready for use. The company will hire a driver for each vehicle at cost of sh 480,000 per year.

Fixed costs of operations will be Sh.30 million per year. These costs are expected to increase by 8% per year.

Sh.2 million of working capital would be needed to be injected immediately before operation commences.

Variable costs will be Sh.40 per textbook. The variable costs will increase by 5 % per year.

Over the next five years, Ujuzi Mwingi's cost of capital is expected to be 15 % per annum, constant.

The residual value of the business at the end of five years of operation is estimated at Sh.40 million.

Further to this, Ujuzi and Mwingi paid Sh.1,6 million at the beginning of the year to Soko Consultants to conduct a market survey on possible selling prices and market demand for books. Soko Consultants provided the following details in their report:

THE TABLE BELOW SHOWS THE PROBABILITY OF DEMAND vs QUANTITY DEMANDED AT SH. 200 PER BOOK. NOTE : REPRESENTS ONE FULL YEAR. 

Probability of demand : 0.10 0.20 0 .40 0.20 0.10

Quantity demanded at

Sh.200 per book : 275,000 375,000 450,000 475,000 500,000

The selling price per book is expected to increase by 5 % per year for the five years. Assume all cash flows take place at the end of the year except where stated otherwise.

Required:

(a) What is the expected revenue

(b) Net present value of the venture for the first five years of operations.

(c) A brief analysis on any issues or limitations of methods and data, which have been used in this venture.

Note : 3 accounts that are needed to be opened namely

1. Initial investment Cash flow
2. Annual Cash flow
3. Terminal Cash flow