QUESTION 1: WEIGHTED AVERAGE COST OF CAPITAL (50 Marks) 1.1. CleanVac Limited is a listed company and is the market leader in vacuum cleaner manufacturing in New Zealand. The company is undertaking a six-year project to set up a manufacturing plant overseas to produce a new line of residential vacuum cleaners. The company bought a piece of land five years ago for $ 7.2 million in anticipation of using it for its proposed manufacturing plant. If the company sold the land today, it would receive $ 10.25 million after taxes. In six years, the land can be sold for $13.5 million after taxes and reclamation costs. The manufacturing plant will cost $225 million to build. The following market data on CleanVac Ltd are current: Equity 10,000,000ordinary shares, selling for $51 per share Non-redeemable Preference shares 9,000,000 shares (par value $ 9 per share) with 4.5% dividends (after taxes), selling for $13.65 per share Debt $100,000,000,4.42% coupon bonds outstanding with ten years to maturity redeemable at par, selling for 95 per cent of par; the bonds have a $1000 par value each and make semi-annual coupon payments. The following information is relevant for analysis: CleanVac Ltds tax rate is 28% The company had been paying dividends on its ordinary shares consistently. Dividends paid in the past six years are as follows Year(-6) ($) Year(-5) ($) Year (-4) ($) Year (-3) ($) Year (-2) ($) Year (-1) ($) Year (0) ($) 4.2 4.3 3.95 4.1 4.28 4.36 4.47 The project requires $ 6.10 million in initial net working capital investment in year zero. Required: 1. Calculate the projects initial (time 0) cash flows. (4 marks) 2. Compute the weighted average cost of capital (WACC) of CleanVac Ltd. Show all workings and state any assumptions underlying your computations. (16 marks) 3. Using the WACC computed in part (2) and assuming the following, compute the projects Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period and the Profitability Index (PI). a. The manufacturing plant has a ten-year economic life, and CleanVac Ltd uses the Diminishing value method of depreciation for the plant using a 22% annual depreciation rate. At the end of the project (i.e., at the end of year 6), the plant can be scrapped for $ 36 million. b. The project will incur $180 million per annum in fixed costs c. CleanVac Ltd will manufacture 260,000 residential vacuum cleaners in year one, and the production is expected to increase at 1 per cent per year for the rest of the project period. d. The expected average selling price per vacuum clear is $2,100. e. The variable production cost in year one is expected to be $920 per vacuum cleaner. However, the management estimates that the cost will increase by 1.25 per cent per year for the rest of the project period. f. At the end of year 6, the company will sell the land. (25 marks) Note: Work all solutions to the nearest two decimals. 4. Based on your analysis, make a recommendation to CleanVac Ltd whether the company should go ahead with the project. Justify your recommendation. (5 marks)