2. C plc is a company currently engaged in the manufacture of baby equipment. It wishes to diversify into the manufacture of snowboards The investment details The company's equity beta is 1.27 and its current debt to equity ratio is 25:75, however the company's gearing ratio will change as a result of the new project. Firms involved in snowboard manufacture have an average equity beta of 1.19 and an average debt to equity ratio of 30:70 Assume that the debt is risk free, that the risk free rate is 10% and that the expected return from the market portfolio is 16% The new project will involve the purchase of new machinery for a cost of $800,000 (net of issue costs), which will produce annual cash inflows of $450,000 for 3 years. At the end of this time it will have no scrap value Corporation tax is payable in the same year at a rate of 33%. The machine will attract tax allowable depreciation of 25% pa on a reducing balance basis, with a balancing allowance at the end of the project life when the machine is scrapped. The financing details: The new investment will be financed as follows: Debentures (redeemable in three years' time): 40% Rights issue of equity: The issue costs are 4% on the gross equity issued and 2% on the gross debt issued. Assume that the debt issue costs are tax deductible 60% Required: Calculate the adjusted present value of the project