Rondo plc, a sports apparel manufacturer with a cost of capital of 13.75%, is looking to expand its activity and is considering two possible countries to open a sales subsidiary. Rondo only has the ability to raise £1,300,000, which is the amount required to open each of the subsidiaries, so it needs to choose between the two investments, which are expected to generate the following cash flows:
|
Year
|
Country Far Away
(in £'000)
|
Country Nearby
(in £'000)
|
|
1
|
600
|
200
|
|
2
|
600
|
300
|
|
3
|
600
|
1,000
|
|
4
|
750
|
1,500
|
Make a recommendation to Rondo, plc as to which project it should implement, including an indication of whether that decision should be different in case the cost of capital changes in the near future.