Question 5 (total of 15 marks): See the below hostel business
project. Note that ‘k’ is an abbreviation for kilo. So $1k is
$1,000. The unit sales is measured in nightly stays. Hostel
Business Project Data Project life Perpetual Initial market value
of the building and land $3,000k Initial book value of land $1,000k
Initial book value of building 0 Depreciation of building and land
pa 0 Unit sales at end of each year 10k nights Sale price per unit
at end of each year $50/night Variable cost per unit at end of each
year $20/night Manager salary pa, paid in arrears $120k Required
return on assets (WACC before tax) 10% pa Tax rate 30% Note 1: The
investor already owns the building and land which are currently
unused. However, they could be sold immediately for $3,000k as one
parcel. The building is fully depreciated for tax purposes so if
it’s not sold and is used it in the hostel project, it would incur
zero depreciation expense. The land is also not depreciable. The
book value of the land is $1,000k and the building has zero book
value. Note 2: Initially (t=0) you expect an increase of 90k in
your accounts payable (current liability) and 10k in your bathroom
consumables inventory (current asset). The account payable will be
repaid and the current asset used up on the last day of the year
(so each will be zero), but then the next day of the new year they
will increase back to their initial levels again, and so on every
year forever. Therefore the only change in net working capital due
to the project will be at the initial time (t=0). Note 3: The
business is expected to operate forever and the hostel project’s
year 1 cash flows will be constant every year onwards. This is
because the unit sales, sale price, variable cost, managers’ salary
and working capital requirements are expected to be constant
forever. Also, no further CapEx is expected after the initial
investment. Note 4: The project will be funded by equity only. Feel
free to disregard units when providing your final answer. So if
it’s $50k, you can just write 50. This question will be marked by a
teacher so you can show working if you want, though it’s
unnecessary to score full marks.
Question 5c (3 marks): Find the project’s FFCF at time 1.