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Easyshop ple is planning to launch a home shopping page on the internet. Customers would be able to place their orders via a computer terminal and Easyshop would guarantee to deliver the goods within $48$ hours.

To prepare for the launch, Easyshop has spent $100,000$ developing the web page. At launch a marketing campaign will be instigated which is likely to cost $500,000,$ payable immediately. To support the project $600,000$ would be spent on advertising in year $1$ and $400,000$ in year $2.$ No further advertising expenditure is anticipated.

As the concept of shopping via the internet is still quite new Easyshop expects demand to be low initially but to build up once people become more familiar with the concept. In the first year of operation it is anticipated that $150,000$ orders will be made. Orders will then be expected to increase by $30\%$ per year for each of the next three years betore falling by $50\%$ in year $5$ after which the project will be terminated.

The average sales revenue per order is anticipated to be $20$ in year $1$ which will rise in line with inflation which is expected to be $3\%$ per year. The cost of goods sold is $78\%$ of sales revenue, excluding delivery costs.

Easyshop will make a fixed charge of $2\mathrm{.}50$ per order for delivery which is anticipated to remain unchanged over the $5$ year life.

One van and driver will be required for each $7,500$ deliveries per year, or part thereof. Drivers will each be paid $11,000$ in year $1$ and the wage rate for all drivers will increase by $4\%$ per year thereafter.

The vans will cost $12,000$ each and will be purchased, and paid for, at the beginning of the year in which they are needed. They will be sold for immediate cash payment when no longer needed. The vans will be depreciated fully over their useful life of $5$ years using straight$-$line depreciation and, when sold, will realise their net book value. The oldest vans will always be sold first.

Warehouse space will be rented for a five year period at a cost of $500,000$ per year, payable at the beginning of the year concerned.

The appropriate discount rate is $15\%$ per year.

Assume that all cash flows arise at the end of the year concerned except as indicated above.

Required:

$($a$)$ Advise the directors of Easyshop ple whether the project should be proceeded with. Present your main calculations in the form of a table.

$(13$ marks$)$

$($b$)$ As an alternative to purchasing the vans, Bull ple has agreed to supply all the vans Easyshop ple requires over the five year period for a fixed rental charge of $85,000$ per year payable annually in advance. Would you advise the finance director of Easyshop ple to accept this offer? Provide calculations to support your recommendations.

$(7$ marks$)$

$($c$)$ Briefly explain why discounted cash flow analysis is appropriate when evaluating long$-$term projects.

$15$ marks

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