Financial Information Tables:

Table 1

Product Market Estimates Immediate total potential worldwide market for product is NZ$1,000 million revenue (equivalent) and this is expected to grow by 5% annually.

The projected products share of the world-wide market is expected to reach 2% in the first year (i.e. in Y1) of operation and increasing by 1% annually (i.e. 3% of world-wide market in Y2, 4% in Y3 etc.).

Table 2 Marketing and Production Estimates Estimated life of investment 5 years (the assumption is that by the end of this period new investment will need to be made to replace what is expected to be, by then, an obsolete process).

The initial investment in production facilities is expected to be $50,000,000.

Additional inventory levels of $250,000 will be required (assume starting in Y1) and will increase annual by 5% during the life of the project. Additional Accounts Receivables $2,000,000 will be held by Y1 and this will increase annual by 10% during the life of the project. Additional Accounts Payables of $1,000,000 will be outstanding by Y1 and will increase annual by 5% during the life of the project. Marketing expenditure will commence immediately with a $5,000,000 investment in worldwide advertising and product awareness education (assume this all occurs in Y1) followed by four years of reducing marketing expenditure at the end of each subsequent year i.e. $4,000,000 in Y2; $3,000,000 in Y3; $2,000,000 in Y4 and $1,000,000 in Y5. Sales revenue is expected to be $20.00 per unit.

Variable production costs are expected to be 50% of revenue.

Fixed costs of production (excluding depreciation) are expected to be $2,500,000 p.a. Production equipment will be depreciated on a straight-line basis at 20% p.a. with no residual value expected.

Table 3 Economic and other data New Zealand company tax rate 28% Assume tax in any year is payable in full at the end of that year. Assume that tax rebates can be off-set against other division profits and represent a cash inflow in the same year they occur. New Zealand inflation rate 5.4%p.a. Relevant borrowings and rates are shown in

Table 4. Total long-term debt should include non- current lease liabilities and you should assume the average cost of lease liabilities is 4.0%p.a.. The risk-free rate rF is currently 3.0%p.a.

Due to continuing volatility and uncertainty following COVID-19 the expected market return rM is currently around 10% Comvita Limited has an equity beta of 0.83

QUESTION : Determine Comvitas WACC that is applicable for use in a financial analysis.