As the project manager of CAPEX Inc., you are considering investing in a project called Azure, to diversify the product lines.

CAPEX Inc, has the following characteristics:

Preferred shares

a. CAPEX Incs preferred shares pay a constant annual dividend of $2.00 and are currently selling for $20.00.

b. CAPEX Inc. has 150,000 preferred shares outstanding.

Common Shares

a. The company is expected to pay an ordinary share dividend of $2.5 in one year, with an anticipated growth rate of 2% p.a. each year thereafter.

b. The ordinary shares are selling at a price of $25.00. c. CAPEX Inc. has 800,000 common shares outstanding.

d. The ordinary share and preference share dividends are fully franked, and shareholders can fully utilize their franking credits.

Bonds

a. CAPEX Inc. has 10-year bonds outstanding with a coupon rate of 7% p.a., with coupons paid annually.

b. The bonds are currently selling at their face value. c. CAPEX Incs market value (in 000s) of debt is $15,000.

It is expected that Project Azure will have the same risk and will use a financing mix similar to that of CAPEX Inc. You have also collected the following information for Project Azure:

The equipment used for Azure currently has a book value (in 000s) of $3,000 with 3 years straight-line depreciation (to zero) remaining and is expected to be sold for $500 at the end of the project.

If Azure is accepted, CAPEX Inc. will need to hire an additional manager with an annual salary (in 000s) of $150.

Azure complements another product of the company. As a result, you anticipate increased annual sales (in 000s) of $350 per year for the other product line.

Total research expenses (in 000s) to gather information about Azure are $150 to date.

If Azure is accepted, the company will have to forego another project that has an NPV (in 000s) of $1,200.

Anticipated sales, sale price per unit, and the cost of producing each unit are shown below:

End of year	Units sold (000s)	Sale price per unit	Cost of producing per unit
1	800	$11	$8
2	900	$11	$8
3	1100	$12	$10

CAPEX Inc. operates in an imputation tax system and the applicable company tax rate is 30%.

1. (a) What are the net cash flows (after-tax) for Project Azure in Years 0-3?

2. (b) What is the weighted average cost of capital of CAPEX Inc.?

3. (c) What is the NPV of Project Azure? Should you accept the project? Explain.

4. (d) Now your director says he has three other independent projects (Alpha, Beta, Gamma), each lasting for 3 years (that are not divisible), with the following characteristics (in 000s):

Project	Initial Outlay	NPV	IRR
Alpha	-$1,000	$500	50.46%
Beta	-$2,000	$750	20.42%
Gamma	-$1,500	$1,000	38.37%
Project Azure	?	?	18.60%

Your director says CAPEX Inc. has a total budget of $6 million only. How many projects (s) should CAPEX Inc. undertake in total, including Project Azure? Is Project Azure included in your decision or not? Explain.

(e) Is your decision in part (d) wealth maximizing for your shareholders or not? Explain.