Circlerock Plc is a multi-million international organisation based in the United statements of America. The company is considering a five year gas project in the Tanganyika region in north east Zambia. The project will cost $1800, 000 in capital investments and will need an initial working capital of K1800, 000.

The project will sale 420,000 tubes of gas in each of the five years of its life. Selling price and direct production costs are given as follows:

Selling price K12 per tube Direct cost K9 per tube

Selling price and direct costs are expected to inflate at 3.5% and 2% respectively. Working capital will inflate at the same rate as direct costs but working capital requirement is expected to reduce by 50% at the start of the 3 year.

Circlerock will charge head office fees equivalent to 5% of initial investment for year one and thereafter increase the fee by $20,000 every year. Tax allowed depreciation will be claimed on the straight line basis with no project sale value at the end of year five. Tax in Zambia is paid at 20% and at 25% in the United States of America.

The project will be financed 20% equity and the balance will be financed by debt. The interest free rate in Zambia is 6% on quality commercial bonds. Circlerock has decided to raise all the funds in Zambia. Of the debt required, 60% will be raised through a government subsidised loan scheme which lends at 400 basis points below the risk free rate. Issue costs on equity and debt are 3% and 2% respectively of the funds required.

The project equity beta is 1.8 and the market risk premium is 5%. (Use project Debt to equity). The general inflation rate in Zambia is 7% and 4% in the US. The sport rate at start of year One is given as $/ZMW 7. Annual lending rates are 5% in Zambia and 3.5% in the US while deposit rate are 4% in Zambia and 3% in the US. Circlerock is worried about the movement in exchange rates and wishes to hedge the management fee expected in the 4th year.

Required.

1. Calculate in USD the project Adjusted present value (30 Marks)