NOTE:

• Properly label the values such as amounts (with $), percentages (%), and other relevant items.

• Show $ values above $1,000 without decimals and show % in 2 decimal places.

• There is no need to insert text boxes on Excel to write formulas or texts.

Wave Co is considering investing $3.5 million in some projects. The finance manager has identified three possible options from three different product lines of the company for investment and you as a consultant have been assigned the job of appraising these projects for investment.

The following information is available about the capital structure of the company:

Authorized share capital, $0.50 each	109 million shares
Issued share capital, $0.50 each	89 million shares
10% Bonds issued, $100 each	2.1 million bonds

The current market price of a share is at $6 per share after the dividend has been just paid and next years dividend per share is expected to be 12 cents. The average annual dividend growth rate is at 13 percent.

The bonds which are compounded annually are currently being traded in the market for a price of $105 per bond and redeemable in 6 years at par.

The projects identified are not divisible and may not be postponed until a future period. The annual tax rate is 30%, and it is paid one year in arrears.

The details of the projects identified are as follows:

Project A

This project has been proposed by the Hardware Division for the expansion of production on an existing product and requires a machine costing $1,010,000 and an additional $180,000 is also needed as installation cost. The scrap value of the machine is 5% of the purchase price and the expected life is four years.

The following is forecasts of productions, sales, variable costs and selling prices.

Year	1	2	3	4
Production (units)	32,900	34,300	36,800	38,500
Sales (units)	31,500	33,800	37,300	39,900
Variable production cost per unit ($)	60	74	77	94
Selling price per unit ($)	95	109	112	129

The fixed overheads of $780,000 in the first year is expected to increase by $2,000 every year.

The initial investment will attract tax-allowable depreciation on 20% reducing balance basis. The company wants to finance this project fully using equity capital.

REQUIREMENTS

1. Determine the cost of equity, cost of debt and weighted average cost of capital for the company.

(10 marks)

2. For each project, calculate the expected net present value (NPV), internal rate of return (IRR), profitability index (PI), return on capital employed (ROCE), payback period (PP) and discounted payback period (DPP).

(60 marks)