FNM19: Investment Appraisal - Price Leisure and Entertainment Plc - Finance Management Assignment Help

Assignment Task:

Part (A)Investment Appraisal 
Leisure and Entertainment plc are considering a proposal to build and operate a new outdoor and indoor water park on a site in the southeast of England for at least 7 years from the water park opening. 

The plot of land on which the water park is to be built is already owned by the company but has not yet been developed. The original cost of the land to Leisure and Entertainment plc was £1.5 million but a local housing developer has recently offered the company £2 million to buy the land. The water park development will take one year to complete but the business terms of the building contractor stipulate that they require the building costs to be paid in full at the outset. The total build cost is estimated to be £4 million and the water park will be ready to open after one year.    

Prior to the development of the water park proposal, the marketing department of Leisure and Entertainment plc conducted research into the potential demand in the southeast for a new water park. This detailed market research cost in total £450,000 and in particular investigated how demand would respond to different prices. Two entry prices were identified and the probabilities associated with the number of visitors per month are identified below:

Prices of entry for the opening year
Probability                £20                    £30
0.25                    10,200 visitors                9,300 visitors 
0.40                    6,000 visitors                 5,400 visitors 
0.35                    12,900 visitors             12,600 visitors

Following the opening year, it is anticipated that the price of entry would increase by 5% per annum during operational years without affecting visitor numbers. The annual costs of running and maintaining the water park are estimated to be £3 million in the opening year and these are expected to rise by 2% in each subsequent year of operation. The contribution generated from visitor spend on refreshments and souvenirs is estimated to average out at approximately £5 per visitor for each visit.     

Corporate tax is payable one year in arrears at a rate of 30%. The accountant has also informed you that writing down allowance on a 25% reducing balance basis, claimable from year 2 onwards, is applicable to an investment in the machinery of £1 million. The investment in machinery has been included in the total build cost of £4 million. The machinery is expected to be used over the length of the proposed project and is expected to have a residual value of £100,000. The machinery is integral to the water park and cannot be sold separately. 

At present Leisure and Entertainment plc intend to invest in the water park project for the long run, but after 7 operational years, there is increasing uncertainty regarding cash flows. It has also been estimated that following 7 operational years the project could be sold on a going concern basis for £8 million.      

The accountant has also estimated that the company’s cost of capital appropriate for this project is 8%. 
 
Required:

I) Evaluate which price Leisure and Entertainment plc should charge for entry to the water park. You should present your evaluation on an excel spreadsheet.                                            
ii) Using the price you have recommended in part i) above, calculate the after-tax Net present value (NPV) of the water park proposal. You should use a spreadsheet to organize and present your calculations and state clearly any assumptions that you have made and provide enough commentary to explain briefly the approach taken.    
                            
iii) Briefly discuss the subjectivity of the NPV calculated and identify those areas of the analysis that you consider to be particularly problematic in this regard. 

iv) Critically discuss the empirical evidence with regards to the use of investment appraisal
methods by firms in practice, and consider how this contrasts with theoretical prescriptions of what investment appraisal methods firms should be applying.         
                            
Part (B)Sources of Finance

Leisure and Entertainment plc are considering how to fund the waterpark project and have provided you with the following additional information: 
•The company operates within the UK only and is listed on the London Stock Exchange. 
•They currently have substantial cash reserves  
•Their gearing ratio (debt:equity) is 1:1, which compares against a sector average of 1:2 
•The company has a high level of investment in tangible assets
•Their equity beta is 2.5.

Required:

Using the information provided above, provide a report to Leisure and Entertainment plc that evaluates sources of finance that would be appropriate for the company to use in order to fund the waterpark investment. 
(30%, approximately 2000 words)

 
Marking Criteria:

•An evaluation of which price Leisure and Entertainment plc should charge for entry to the water park: Is the approach used appropriately? Are the calculations correct? Have calculations been presented clearly on an excel spreadsheet? 
•Has the Net Present Value (NPV) method of investment appraisal been understood and applied appropriately? Has tax been incorporated accurately? Have relevant cash flows been identified and included? Has all the information relevant to the NPV been identified and incorporated? 
•Are the assumptions clearly stated, realistic and appropriate? Are the calculations presented clearly using an excel spreadsheet? Has excel been used appropriately? Are supporting workings clearly presented? Has the approach taken been clearly explained
•Has the subjectivity of the NPV approach been discussed? Have areas within the analysis that could be considered particularly subjective been identified and discussed?  
•To what extent has the empirical evidence regarding the uptake of investment appraisal methods by firms been discussed? How effectively has the evidence been organized and summarised? Has the evidence been critically discussed? Has an appropriate range of evidence been reviewed?
•Have theoretical prescriptions of what investment appraisal methods firms should be applying been outlined and discussed? Have investment appraisal methods been explained in terms of their theoretical and practical advantages and disadvantages? To what extent has this discussion been contrasted with the empirical evidence regarding the uptake of investment appraisal methods?
•Have an appropriate range of sources of finance been identified and discussed? Have sources of finance been evaluated from Leisure and Entertainments perspective, or described? Is the discussion clearly presented in a report format?
•Has the information provided by Leisure and Entertainment plc been considered appropriately and referred to within the discussion? Has the information provided informed the discussion of sources of finance?
 

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