QUESTION 2 [12 marks]

Thuthuka Manufacturers is considering to launch a new product. It has estimated the project lifespan to be 4 years, after which the product will be replaced by a newer and updated version.

They are planning on financing the project through the following sources:

Source	% of funding	Cost of funding (before tax)
Draw-down on current bond	20%	11.50%
New bank loan	40%	10.00%
Issue of preference shares	40%	10.25%

The marginal tax rate applicable is 28%.

The following after tax cash-flow was drawn up specifically for the launch of the new product:

REQUIRED:

2.1 Based on the information provided, calculate Thuthuka Manufacturers Weighted Average Cost of Capital (WACC). (4 marks)

2.2 Using your answer in 2.1 calculate:

the Net Present Value (NPV) of the new product and

the Internal Rate of Return (IRR) of the product cash flows.

Your answer should include the Excel formula used. (2 + 3 = 5 marks)

2.3 Based on your calculations comment on whether Thuthuka Manufacturers should invest in the new product or not. Motivate your answer. (3 marks)