JD Sports Fashion Plc is currently evaluating a new project that will expand its lines to include a designated golf line that will offer not only clothing but also golf equipment and accessories. The project will require an initial outlay of £20m on production machinery and other costs. The project is expected to have a three-year life span and the cash flows associated with the projected are projected in the below table:

Table 1: JD Sports Fashion Plc potential project's cash flow information

All figures in £'m   2021   2022   2023

Sales                      45.0   52.0     58

COGS                   (24.8)  (28.6)  (31.9)

Gross profit       20.3    23.4     26.1

OPEX                    (2.0)     (2.5)    (3.0)

EBITDA               18.3     20.9     23.1

Depreciation            (1)       (1)         (1)

EBIT                      17.3     19.9       22.1

Tax expense          (3.3)    (3.8)        (4.2)

EBIAT                     14       16.1        17.9

CAPEX                     4           2            2

Investment in WC     0           0            3

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortisation.

EBIT: Earnings before Interest and Taxes.

EBIAT: Earnings Before Interest and After Taxes. For simplicity, taxes calculated assuming no interest expense.

Annual 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 60% of the cost of the project, with an annual interest charge of 5%. The company currently has £3m of retained earnings available for this project, and the remainder would potentially be financed with a 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.

Table 2: Additional information

Risk free rate ?

Project cost of debt pre tax 5%

Market premium ?

Marginal corporate tax rate 19%

JD sport Unlevered Beta 1.77

You will need to research the other values needed to complete Table 2 above.

Required: The company believes it will be a successful project and will help to distinguish it from its competitors. However, the company would like you to evaluate the project using different methods and present a proposal to the investment committee in order for them to approve it.

a) JD Sports Fashion Plc is considering financing the project with 60% debt. Using the Internal Rate of Return (IRR) and Net Present Value (NPV), appraise the project. Hint: calculate the free cash flow of the project and use CAPM to compute the discount rate.

b) Evaluate the project using Adjusted Present Value (APV).

c) Assuming the market risk of the project is similar to the overall market risk of the firm, revise the project's NPV using the Weighted Average Cost of Capital (WACC). Compare the answer to part a). Note: Assume the same level of debt is held until the end of the project. Do not consider the repayment of the debt principal in any of the above valuations in parts a) to c).

d) Compare the methods used and give a final recommendation to the investment committee. Make sure you critically evaluate all methods and discuss other risk factors that were not included in the analysis.