1.E4A PLC is considering Bee Keeping Business beginning 2013 E.C. The following are project requirements and costs related to the new project:

oLand will be obtained on a lease basis for annual rental payment of Br800,000 payable at the beginning of each year overterm of the lease. The lease satisfies the conditions for IFRS 16 lease contract & the lease term is 6 years. The costs of constructing fences and other infrastructures is Br1,500,000 with no residual value. An office building will also be constructed at a cost of Br1,200,000 with no residual value.

oProposed number of hives: 600 (acquires for Br 3,000 each hive including bees). The salvage value of bee hives is Br 150,000. Site preparation costs (to be added to cost of hives) total Br240,000.

oProduction equipments will cost the PLC Br520,000 with salvage value of Br 40,000.

oThe cost of office equipments and furniture totals Br360,000 with no residual value.

oNumber of people to be employed... 25 (the average wage of each employee is Br 7,000 per month and becomes Br 9,000 per month starting from year 4).

oRaw materials... Sugar and other carbohydrate products..... 2 kilogram per hive per day for 365 days a year. The cost per Kilogram of these raw materials will be Br 50 from year 1 to year 3 and Br 55 from year 4 to year 6.

oCleaning supplies worth Br 7,000 per month.

oOther Selling and other administrative expenses total Br 100,000 per year.

oProduction:

o12,000 kilograms of honey per month (Sold for Br 200 per kilogram in year 1 and will increase by 10% each year starting from year 2)

o6,000 kilograms of byproduct for wax manufacturing per month (sold for Br 30 per kilogram in year 1 and will increase by 20% each year starting from year 3)

oThe project needs the following minimum balances on hand throughout the life of the project:

1. cash balance of Br150,000 per month
2. Raw materials inventory of 30 days.
3. Cleaning Supplies of 3 months

oPreparatory study costs: Br 90,000 (Br 30,000 is already spent). Such costs will be amortized over 6 years on straight line basis.

oThe PLC will finance this project using target capital structure of 60% bank loan and 40% equity. The bank loan will be obtained at 14% annual interest rate. Interest will be paid at the end of each year & the principal will be repaid after 6 years. Equity will be raised by issuing Br1,000 par value shares. The market required rate of return from equity, risk free rate and beta (risk measure) will be 16%, 4% and 1.5 respectively.

oTax rate is 30%.

oProject's life is assumed to be 6 years.

oThe useful life of property, plant & equipment items is assumed to be the project's life and straight line method of depreciation is to be used.

oThe project's discount rate will be the weighted average cost of capital.

oAnnual interest payments on debt used to finance this project would be a tax deductible expense.

oAll purchases and sales are on a cash basis.

Required:

1. Calculate the Weighted Average Cost of Capital (WACC) for the project. Hint: Use CAPM to calculate cost of equity.
2. Determine the investment cost of the project
3. Determine the relevant cash inflows of the project for each of the six years
4. Determine the relevant cash outflows of the project for each of the six years
5. Prepare the projected income statement for each of the six years
6. Determine the net cash flows of the project for each of the six years
7. Evaluate the feasibility of the project using
8. Payback period method where the acceptable time limit is 2 years
9. Average Accounting Rate of Return where the required AARR is 40%
10. NPV
11. Profitability Index
12. IRR
13. Discounted Payback Period where the acceptable time limit is 3 years