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06-02-2019

Product code Finance-PH331

Motorway Toll Ltd has been offered the chance to bid on the new M21 toll road which connects London to Coventry.  It is the first UK toll motorway and the company has undertaken significant analysis of the likely level of demand over the next three years.  The Board of the company has asked you as the Finance Manager to undertake further investment appraisal of the project to help it create the right kind of bid proposal.  The following information is available.

The company has debt which costs 11% and its estimated equity cost of capital is 15%, it is geared 50:50.

The cost of the toll for using the road has been extensively researched and the marketing department has arrived at a figure of £10 per car, per journey as acceptable to motorists.

The Finance team has estimated that running the toll service will cost £1,200,000 per annum.

The contract is for three years and the likely acceptable bid price for exclusive rights to operate the toll road is £1,000,000.  All fixtures and fittings required to operate the toll road are included in this price, as is ongoing maintenance of the road and the toll facilities.

The analysis so far has predicted the following demand levels:

Motorway Toll Ltd: Investment Appraisal 

Estimated Demand

     

Year

1

2

3

Number of journeys

150000

185000

350000

 

These could vary by as much as ten percent in either direction.

The company has a hurdle payback period of two years, a companywide average return on investment of 25%.

So far the company has invested £100,000 in research and administration.

In recent years, Motorway Ltd have paid a relatively consistent and stable dividend to its shareholders. The directors of Motorway Ltd are committed to the maintenance of a regular and consistent pattern of dividends to investors.

Required:

Prepare a business report for presentation to the Board of the company. Your report should:

  1. Identify the relevant cash flows and cost of capital for investment appraisal

(10%)

  1. Calculate the payback and the accounting rate of return of the proposed investment.

(10%)

  1. Calculate the net present value of the project and determine the internal rate of return.

       (10%)

  1. Discuss the advantages and disadvantages of the payback, accounting rate of return and net present value techniques.

               (30%)

  1. Discuss dividend policy models and recommend a dividend policy that might meet the expectations of Motorway Ltd’s shareholders. 

       (40%)

 

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Motorway Toll Ltd has been offered the chance to bid on the new M21 toll road which connects London to Coventry. It is the first UK toll motorway and the company has undertaken significant analysis of the likely level of demand over the next three years. The Board of the company has asked you as the Finance Manager to undertake further investment appraisal of the project to help it create the right kind of bid proposal. The following information is available.

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