Question
Beacon plc is considering the viability of a project that requires the acquisition of plant costing 75,000. The project is expected to yield pre-tax annual
Beacon plc is considering the viability of a project that requires the acquisition of plant costing 75,000. The project is expected to yield pre-tax annual revenue of 40,000 net of all other expenses. The project is expected to have a useful economic life of three years, at the end of which the net residual value of the plant is estimated to be nil.
The current market cost of debt is 8%: however, it is government policy to support the acquisition of the plant needed for the project and, in consequence, a subsidised loan of 30,000 is available from the government at a rate of 4%, repayable at the end of the projects life. The balance of the cost of acquisition will be met by an issue of equity that would incur issue costs of 5%.
The proposed project is located in an industry where equity betas are typically 1.4 and the average debt to equity ratio is 1:3. The risk-free rate is 4% and the market rate is 10%. Corporation tax is levied at a rate of 24%, which is not expected to change for the foreseeable future.
Assume that tax is paid immediately at each year-end and that there are no capital allowances available.
Required:
Calculate the APV of the proposed project.
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