Hey guys and gals!

I am stuck on a question and have no idea where to begin! Your help would be awesome!
If you could tell me not the calculations but just where to begin and what to consider!
Here it is!

Bluewater plc, a manufacturer of speciality chemicals, has been reported to
the anti-pollution authorities on several occasions in recent years, and fined
substantial amounts for making excessive toxic discharges into local rivers.
Both the environmental lobby and Bluewater's shareholders demand that it
"clean up" its operations.

It is estimated that the total fines it may incur over the next four years can be
summarised by the following probability distribution (all figures are expressed
in present values):

Level of fine
£'millions

0.5
1.4
2.0

Probability
0.3
0.5
0.2

JPG Ltd, a firm of environmental consultants, has advised that new equipment
costing £1 million can be installed virtually to eliminate illegal discharges.
Unlike fines, expenditure on pollution control equipment is tax-allowable via a
25% writing-down allowance (reducing balance). The rate of corporate tax is
30%, payable one year in arrears. The equipment will have no resale value
after its expected four year working life, but can be fully operational prior to
Bluewater's next financial year.

A European Union Common Pollution Policy grant of 25% of gross
expenditure is available, but with payment delayed by one year. Immediately
on receipt of the grant from the EU, Bluewater have entered a contract to pay
20% of any grant received to JPG Ltd, as payment for the advice already
provided. These transactions have no tax implications for Bluewater.

A disadvantage of the new equipment is that it will raise production costs by
£30 per tonne over its operating life. Current production is 10,000 tonnes per
annum, but is expected to grow by 5% per annum compound. It can be
assumed that all other production costs and product prices will remain
constant over the next four-year period. As a consequence of this, no change
in working capital is envisaged.

Bluewater applies a discount rate of 12% after all taxes to all of its investment
projects and normally assumes that all cash flows, other than those occurring
immediately, occur at each year-end.

REQUIRED:
Write a report to Bluewater's management, advising them of the desirability of
the project. Your report should consider;

1. financial and non-financial criteria,
2. the relative merits of the investment appraisal techniques employed, and
3. how risk may be incorporated into your analysis

State clearly any assumptions that you make!



Thanks !