PLEASE DO QUESTION THREE

(i) Estimate the NPV of the investment project at the start of 2021 if it is 100% financed with equity and assuming that the project is terminated at the end of 2026. Show and explain your calculations and comment on your findings.

(ii) Use the WACC method to estimate the NPV of the investment at the start of 2021 assuming that it is financed 55% with equity and 45% with debt and that the project is terminated at the end of 2026. Show and explain your calculations and comment on your findings.

Calculate again the NPVs of parts (i) and (ii) by assuming that the project is not terminated in 2026 and that, instead, it is expected to produce the same cash flow (i.e. with zero future growth in cash flows) as that for the year 2026 in perpetuity. Show and explain your calculations and comment on your findings

QUESTION 1 (a) You are the financial manager of a very profitable firm, which is currently evaluating a new, large investment project at the start of 2020. The project involves the acquisition of a plant, which requires an initial outlay of 300 million. The project's investment horizon is six years. Over this period, the initial capital investment in the plant should be fully depreciated. Despite this, it is expected that at the end of the project (after six years) the taxable salvage value of the plant will amount to 50 million. The project requires an initial (at the start of 2020) working capital investment of 30 million, which should be recovered in full at the end of 2025. Your accountants have put together the following projections on expected sales and cash flows, and information on the cost of capital of the company: Table 1. Sales and cash flow projections 2020 120 60 2021 135 75 (50) 25 (5) Sales EBITD Depreciation EBIT Tax expense EBIAT 2022 140 80 (50) 30 (6) 2023 125 65 (50) 15 (3) 2024 120 60 (50) 10 (2) 2025 110 50 (50) 0 0 (50) 10 (2) 8 20 24 12 8 0 Table 2. Cost of capital Risk-free Rate (RF) Project Cost of Debt (Rd) Market Risk Premium Marginal Corporate Tax Rate (TC) Asset Beta of comparable companies 1% 4% 6% 20% 0.8 QUESTION 1 (a) You are the financial manager of a very profitable firm, which is currently evaluating a new, large investment project at the start of 2020. The project involves the acquisition of a plant, which requires an initial outlay of 300 million. The project's investment horizon is six years. Over this period, the initial capital investment in the plant should be fully depreciated. Despite this, it is expected that at the end of the project (after six years) the taxable salvage value of the plant will amount to 50 million. The project requires an initial (at the start of 2020) working capital investment of 30 million, which should be recovered in full at the end of 2025. Your accountants have put together the following projections on expected sales and cash flows, and information on the cost of capital of the company: Table 1. Sales and cash flow projections 2020 120 60 2021 135 75 (50) 25 (5) Sales EBITD Depreciation EBIT Tax expense EBIAT 2022 140 80 (50) 30 (6) 2023 125 65 (50) 15 (3) 2024 120 60 (50) 10 (2) 2025 110 50 (50) 0 0 (50) 10 (2) 8 20 24 12 8 0 Table 2. Cost of capital Risk-free Rate (RF) Project Cost of Debt (Rd) Market Risk Premium Marginal Corporate Tax Rate (TC) Asset Beta of comparable companies 1% 4% 6% 20% 0.8