Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Could you please help me resolve this assignment Q2. Question 2 - 50% ASOS Plc is currently evaluating a new project that will expand their

Could you please help me resolve this assignment Q2.

Question 2 - 50%

ASOS Plc is currently evaluating a new project that will expand their current 'living and gifts' line to include not only home accessories but also to produce and sell modern home furniture. The project will require an initial outlay of 6,000,000 on production machinery and other costs. The project is expected to have a three-year life span, and the estimated cash flows associated with the project are presented in the below table:

Table 1: ASOS Plc potential project's cash flow information All figures in '000 2020 2021 2022 Sales 8,200.00 8,900.00 9,300.00 COGS (4,130.00) (4,590.00) (5,100.00) Gross Profit 4,070.00 4,310.00 4,200.00 Operating Expenses (720.00) (805.00) (810.00) EBITDAa 3,350.00 3,505.00 3,390.00 Depreciation (15.00) (15.00) (15.00) EBITa 3,335.00 3,490.00 3,375.00 Tax Expense (600.30) (628.20) (607.50) EBIATa 2,734.70 2,861.80 2,767.50 CAPEXb 12.00 12.00 12.00 Investment in Working Capital 0.00 0.00 (5.00) aEBITDA: Earnings Before Interest, Taxes, Depreciation and Amortisation. EBIT: Earnings before Interest and Taxes. EBIAT: Earnings Before Interest and After Taxes. For simplicity, taxes are calculated assuming no interest expense. bAnnual capital expenditures in addition to the initial outlay, and assumed to cease at the end of the project.

The project has a debt capacity of 30% of the cost of the project, with an annual interest charge of 8%. The company currently has 3,000,000 of retained earnings available for this project, and the remainder would be potentially financed with rights issue. The rights issue incurs additional costs of 2% of the amount raised, and the debt issuance is a bit cheaper, costing 1%, where both issue costs are tax deductible.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Horngrens Accounting The Financial Chapters

Authors: Tracie L. Miller Nobles, Brenda L. Mattison, Ella Mae Matsumura

10th Edition

0133117561, 978-0133117561

More Books

Students also viewed these Accounting questions

Question

1. To understand how to set goals in a communication process

Answered: 1 week ago