11 Wipe Question one (60%) FANGO Itd is now considering different investment options that will make the firm more profitable as well as taste the growth of the company. The financial management team has provided the following financial information relating to one of investment which is perceived to be profitable by most of the managers. i. Estimated cash flows Year 2 34 Expected Pre-tax operating cashflows (Tshs) 1,250,000 1,400.000 1,600,000 1,800,000 The investment will cost Tshs 5,400,000 payable immediately, including Tshs 600,000 for working capital and Tshs 400,000 for issue costs. Tshs 300,000 of issue costs is for equity, and Tshs 100,000 for debt. Issue costs are not tax allowable. The investment will be financed 50% equity, 50% debt which is believed to reflect its debt capacity. Expected company gearing after the investment will change to 60% equity, 40% debt by market values. The investment equity beta is 1.5. vi. Debt finance for the investment will be at 8% fixed rate debenture. vii. Capital allowances are at 25% per year on a reducing balance basis as per tax policies viii. The corporate tax rate is 30%. Tax is payable in the year that the taxable cash flow arises. x. The risk-free rate is 4% and the market return 10% for such investment. The after tax realizable value of the investment as a continuing operation is estimated to be 21.5 million (including working capital) at the end of year 4. xi. Working capital may be assumed to be constant during the four years. Required: a. Calculate the expected NPV and recommend on feasibility of the investment (30 marks). b. If the company anticipate the tax laws to change in which capital allowance for asset/investment of this nature to decline to 20% and tax rate to decline by 30%, examine the feasibility of the investment and recommend to the management of the company. (30 marks)