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| Harrow Co Harrow Co is a diversified holding company with interests in shipping, electronics and property development. The property development division is considering a number of separate projects to invest in. The private sector has been increasingly involved in the provision of public facilities in recent years in the country in which Harrow operates. The projects that Harrow are considering involves the construction of various buildings for use by local residents such as libraries and swimming pools. If Harrow builds and pays for the construction of these buildings then the local government will manage and maintain the building. Harrow will receive a fixed agreed amount every year for the foreseeable future.  All projects are thought to have the same level of risk, can not be postponed and are indivisible. However,in order to encourage companies such as Harrow to invest in such schemes, recent legislation has allowed for the provision of ‘partnership agreements’ whereby the local government will agree to share in the initial cost of the project in return for a pro-rata reduction in the annual fee. This would effectively make the projects divisible. Harrow has a limit of £60 m to invest in the current year. The company’s weighted average cost of capital is 9% after tax.Required (a) Advise Harrow, using suitable supporting calculations, which combination of projects should be undertaken and the resulting increase in shareholder wealth if (i) there is a partnership agreement and (ii) there is no partnership agreement. (You may ignore inflation) (8 marks) |