1. AL is a listed company in the telecommunications business. You are a senior financial management advisor employed by the company to review its capital investment appraisal procedures and to provide advice on the acceptability of a significant new capital project - the Telcom. The project is a domestic project entailing immediate capital expenditure of S970 million at 1 July 2018 and with projected revenues over five years as follows: Year ended 31st 31st 31 st March 31 March March March March 2019 2020 2021 2022 2023 Revenue ($ 780.00 970.00 920.00 850.00 810 million) Direct costs are 60% of revenues and indirect, activity based costs are $150 million for the first year of operations, growing at 5% per annum over the life of the project. In the first two years of operations, acceptance of this project will mean that other work making a net contribution before indirect costs of $140 million for each of the first two years will not be able to proceed The capital expenditure of $970 million is to be paid immediately and the equipment will have a residual value after five years' operation of $20 million. The company depreciates plant and equipment on a straight-line basis and, in this case, the annual charge will be allocated to the project as a further indirect charge Preconstruction design and contracting costs incurred over the previous three years total $50 million and will be charged to the project in the first year of operation The company pays tax at 30% on its taxable profits and can claim a 50% first year allowance on qualifying capital expenditure followed by a writing down allowance of 40% applied on a reducing balance basis. Given the timing of the company's tax payments, tax credits and charges will be paid or received twelve months after they arise. The company has sufficient other profits to absorb any capital allowances derived from this project The company currently has $7.500 million of equity and $2,500 million of debt in issue quoted at current market values. The current cost of its debt finance is SLIBOR plus 160 basis points. SLIBOR is currently 5-40%, which is 40 basis points above the one month Treasury bill rate. The equity risk premium is 3.5% and the company's beta is 1.50. The company wishes to raise the additional finance for this project by a new bond issue. Its advisors do not believe that this will alter the company's bond rating The new issue will incur transaction costs of 2% of the issue value at the date of issue. Required: Estimate the adjusted present value of the project resulting from the new investment and from the refinancing proposal and justify the use of this technique 1. AL is a listed company in the telecommunications business. You are a senior financial management advisor employed by the company to review its capital investment appraisal procedures and to provide advice on the acceptability of a significant new capital project - the Telcom. The project is a domestic project entailing immediate capital expenditure of S970 million at 1 July 2018 and with projected revenues over five years as follows: Year ended 31st 31st 31 st March 31 March March March March 2019 2020 2021 2022 2023 Revenue ($ 780.00 970.00 920.00 850.00 810 million) Direct costs are 60% of revenues and indirect, activity based costs are $150 million for the first year of operations, growing at 5% per annum over the life of the project. In the first two years of operations, acceptance of this project will mean that other work making a net contribution before indirect costs of $140 million for each of the first two years will not be able to proceed The capital expenditure of $970 million is to be paid immediately and the equipment will have a residual value after five years' operation of $20 million. The company depreciates plant and equipment on a straight-line basis and, in this case, the annual charge will be allocated to the project as a further indirect charge Preconstruction design and contracting costs incurred over the previous three years total $50 million and will be charged to the project in the first year of operation The company pays tax at 30% on its taxable profits and can claim a 50% first year allowance on qualifying capital expenditure followed by a writing down allowance of 40% applied on a reducing balance basis. Given the timing of the company's tax payments, tax credits and charges will be paid or received twelve months after they arise. The company has sufficient other profits to absorb any capital allowances derived from this project The company currently has $7.500 million of equity and $2,500 million of debt in issue quoted at current market values. The current cost of its debt finance is SLIBOR plus 160 basis points. SLIBOR is currently 5-40%, which is 40 basis points above the one month Treasury bill rate. The equity risk premium is 3.5% and the company's beta is 1.50. The company wishes to raise the additional finance for this project by a new bond issue. Its advisors do not believe that this will alter the company's bond rating The new issue will incur transaction costs of 2% of the issue value at the date of issue. Required: Estimate the adjusted present value of the project resulting from the new investment and from the refinancing proposal and justify the use of this technique