(b) Calculate the internal rate of return of the proposed investment and comment on your findings. (5 marks)
(b) (i) Advise the directors of GWCC on specific actions which may be considered in order to improve theestimated return on their investment of ￡1,900,000. (8 marks)
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(ii) Briefly discuss TWO factors which could reduce the rate of return earned by the investment as per theresults in part (a). (4 marks)
2 Alpha Division, which is part of the Delta Group, is considering an investment opportunity to which the followingestimated information relates:(1) An initial investment of $45m in equipment at the beginning of year 1 will be depreciated on a straight-line basisover a three-year period with a nil residual value at the end of year 3.(2) Net operating cash inflows in each of years 1 to 3 will be $12·5m, $18·5m and $27m respectively.(3) The management accountant of Alpha Division has estimated that the NPV of the investment would be$1·937m using a cost of capital of 10%.(4) A bonus scheme which is based on short-term performance evaluation is in operation in all divisions within theDelta Group.Required:(a) (i) Calculate the residual income of the proposed investment and comment briefly (using ONLY the aboveinformation) on the values obtained in reconciling the short-term and long-term decision views likely tobe adopted by divisional management regarding the viability of the proposed investment. (6 marks)
(ii) Comment on the figures in the statement prepared in (a)(i) above. (4 marks)
(c) Advise Alan on the proposed disposal of the shares in Mobile Ltd. Your answer should include calculationsof the potential capital gain, and explain any options available to Alan to reduce this tax liability. (7 marks)
(ii) Calculate Paul’s tax liability if he exercises the share options in Memphis plc and subsequently sells theshares in Memphis plc immediately, as proposed, and show how he may reduce this tax liability.(4 marks)
(b) State the immediate tax implications of the proposed gift of the share portfolio to Avril and identify analternative strategy that would achieve Crusoe’s objectives whilst avoiding a possible tax liability in thefuture. State any deadline(s) in connection with your proposed strategy. (5 marks)
