Limited is a publicly listed company on the ASX that manufacturers and distributes hi-tech monocrystalline silicon/graphite encased solar storage panels to both domestic and global markets. The capital structure of the company is as follows:

$20,000,000 Ordinary shares issued, currently trading at $20.00

$10,000,000 Preference shares issued, currently trading at $14.00

$300,000,000 Face Value; 6.00% Corporate Bonds currently trading at $88.70

Ordinary shareholders are expecting to receive a dividend of $2.43 next year, with anticipated growth of 3.0% each year thereafter. The risk-free rate in the marketplace is 4%, the market risk premium is 8%, and the Beta of RENEW-GEN 25 shares is 1.40.

The Preference shares pay a constant dividend of $2.00.

The Corporate bonds have five years to maturity with bond holders receiving the coupon rate paid six monthly (semi-annual).

Current Proposal

The company is experiencing strong and increasing growth due to their extremely efficient solar panels. The company’s current line of solar panels leads the market in helping customers save money on energy costs, while reducing their ‘carbon footprint’. The company believes the next rapid growth area will be in more efficient & updated solar storage, and the Board of Directors are committed to pursuing this new market. This investment will also maintain the company’s reputation as the market leader in innovation and product development in solar energy generation & storage.

As General manager of the company’s capital budgeting department, the board has asked your team to evaluate a project for the RNG-2023, the ultimate intergrated solar storage system, which has the ability for customers to completely disconnect from the grid (still being built & updated). The prototype model has so far cost $4,000,000 in research and development funds, and is now in ‘beta testing’, in readiness for full production.

Due to capacity constraints with their current production facilities, the company will need additional new plant & equipment which will be built on some of the company’s land which it owns; and the current market value of the land is $3,000,000. The project requires an initial capital investment (CapEx) of $30,000,000 to build a new plant and purchase relevant machinery & equipment.

Additional machine installation costs will be $1,000,000; to ensure the machines are operational. The investment will be depreciated (straight-line) over the life of the project which is estimated to be 5 years.

At the end of the project, the plant and equipment is expected to be worth $3,000,000 and the land is expected to be worth $4,000,000 (ignoring CGT and GST).

Anticipated sales are expected to be 5,000 units in the first year. Sales will increase in the next year (year 2) by 20%; and then due to new & aggressive competition, unit sales will then start to decline by 5% the next year; 10% the year after that, and then 20% in the last year (each from the previous year). The company will produce units at a cost of $7,250 each and will sell (retail) them for $10,600 each.

To supplement the production process, the company will need to purchase $4,000,000 worth of inventory (NWC) to commence production, and that inventory will be depleted (or run down & returned to starting levels), during the final year of the project (by year’s end).

There are additional annual fixed costs of $1,400,000. The company will need to hire an additional factory supervisor with an annual salary of $200,000. Lost sales of existing solar systems is expected to be $1,000,000 per year, throughout the project. Total market survey & data research expenses (information gathering for the project analysis) to date; are $500,000.

The company tax rate is 30% and is paid in the year following the year of income.

Capital Expenditure Investment Criteria

The Director’s believe the company’s risk tolerance and investment time horizon is important due to the rapid change in technology & competition becoming ready to hit the market. These newer ESG projects are constantly changing quickly. As a result, the Board has adopted the following decision rules for approving capital expenditure:

Projects need to have:

A Positive NPV;

A Discounted cash flow greater than 30% of ‘CapEx’;

A minimum Internal rate of return (IRR) of double the calculated WACC rate; and

A Payback period of two & a half years or less (half of the expected project time).

Required:

Prepare a spreadsheet (project calculation evaluation) - clearly showing the discounted cash flow for each year. The calculations must include the NPV, IRR and the Payback Period of the project. As well as results compared to the WACC decision rule.

Scenario analysis (3 cases) & Sensitivity analysis (2 cases) MINIMUM should be utilized, to fully justify your recommendations & decision.

You should also demonstrate the WACC for the company, as well as each cost of capital/security, and the “capital structure” of the company.