ADDITIONAL CASE STUDY INFORMATION AND INSTRUCTIONS Your company is evaluating a project that will require an initial investment in fixed asset of $6,980,000. A leasing company has offered to finance the asset acquisition at 7% annual interest. The asset will be fully depreciated straight-line over 10 years at the end of which it will be sold at 20% of initial cost. A market research company that has been paid $150,000 for its services estimates that the project will generate an incremental annual revenue of $3,140,000 for the next 10 years. Corresponding variable costs will be 20% of revenues while annual non-variable costs will be $520,000. The company is also planning to use for the project its idle property that would otherwise be rented out for $90,000 annually. The project will require $230,000 in net working capital at the start, remaining constant throughout the project and which will be fully recovered at the end of 10 years when the project is wound up. The acceptable rate of return for the project will be based on the company's weighted average cost of capital (WACC). Of the company's non-current liabilities, 60% is long-term debt that fully accounts for the financing costs in its income statement. The company's Beta is 1.622, the risk-free rate of return is 4% and the market expected rate of return is 11%. The company's tax rate is 30%. You are required to carry out the following.

1. Generate the projected cash flows for the project for the next ten years using the suggested template as basis for setting up your Excel spreadsheet. The key rows here are the following: operating cash flows, cash flows due to changes in net working capital and cash flows for capital spending. 2. Determine the company's WACC which will serve as the acceptable rate of return for the project. You may calculate it manually showing full workings or you may use the suggested template if you are doing it in Excel.

3. Conduct a financial evaluation of the project by extending the spreadsheet from number 1 according to the suggested template.

(a) Use the Excel function to calculate the NPV of the project and make a conclusion based on this.

(b) Verify the answer by manually calculating the NPV using PV and PV of annuity formulas, showing workings.

(c) Use the Excel function to calculate the project IRR and confirm if this leads to the same conclusion as the NPV method.

(d) Calculate the project payback period and compare with the arbitrary benchmark of 4 years or less. Discuss why this should not overturn the earlier conclusions by citing two drawbacks of the payback method.

Your company is evaluating a project that will require an initial investment in fored asset of $6,980,000. A leasing company has offered to finance the asset acquisition at 7% annual interest. The asset will be fully depreciated straight-line over 10 years at the end of which it will be sold at 20% of initial cost. A market research company that has been paid $150,000 for its services estimates that the project will generate an incremental annual revenue of $3,140,000 for the next 10 years. Corresponding variable. costs will be 20% of revenues while annual non-variable costs will be $520,000. The company is also planning to use for the project its idle property that would otherwise be rented out for $90,000 annually. The project will require $230,000 in net working capital at the start, remaining constant throughout the project and which will be fully recovered at the end of 10 years when the project is wound up. The acceptable rate of return for the project will be based on the company's weighted average cost of capital (WACC). Of the company's non-current liabilities, 60% is long-term debt that fully accounts for the financing costs in its income statement. The company's Beta is 1.622, the risk-free rate of return is 4% and the market expected rate of return is 11%. The company's tax rate is 30%. You are required to carry out the following. 1. Generate the projected cash flows for the project for the next ten years using the suggested template as basis for setting up your Excel spreadsheet (20 marks). The key rows here are the following: operating cash flows, cash flows due to changes in net working capital and cash flows for capital spending. 2. Determine the company's WACC which will serve as the acceptable rate of return for the project (10 marks). You may calculate it manually showing full workings or vou may use the sucgested template if you are doing it in Excel, 3. Conduct a financial evaluation of the project by extending the spreadsheet from number 1 according to the suggested template ( 30 marks). (a) Use the Excel function to calculate the NPV of the project and make a conclusion based on this. (b) Verify the answer by manually calculating the NPV using PV and PV of annuity formulas, showing workings. (c) Use the Excel function to calculate the project IRR and confirm if this leads to the same conclusion as the NPV method. (d) Calculate the project payback period and compare with the arbitrary benchmark of 4 years or less. Discuss why this should not overturn the earlier conclusions by citing two drawbacks of the payback method