Question 2 -

A company is looking to build a manufacturing plant overseas. It will be a 5 year project. The cost of the land for the project is 6,500,000 and the land can be sold for 4,500,000 in 5 years time, irrespective of what is built on it (ignore taxes). The manufacturing plant will cost 15,000,000. The company uses straight line method of depreciation and predicts to sell the plant for 5,000,000 (ignore taxes) at the end of the project. The expectation from the project is to sell 12,000 units per year at a selling price of 9,500 per unit. The variable production costs are 8,500 per unit in each of the 5 years. The company will incur 1,000,000 in fixed costs in each of the 5 years. You are given the following market data on the firm's securities:

- Debt - 150,000 bonds outstanding, 7% coupon, paid annually: 15 years to maturity, each bond has 100 par value and currently sells at 92% of par.

- Ordinary shares - 300,000 shares outstanding, market price 75 per share, and the beta is 1.3

- Preference shares - 20,000 shares outstanding with 5% dividend, par value 100 and market price 70 per share.

The market risk premium is 8% and risk free rate is 5%.The management foresees that the new project is riskier than a typical project they undertake. Thus, an adjustment factor of 1.5% to the cost of capital needs to be done to account for the increased risk. Company tax rate is 30%.

Required is:

a) calculate the project's initial cash out flow at time T=0

b) calculate the market value of debt, ordinary shares and preference shares, as well as the company as a whole

c) calculate the appropriate cost of capital to use when evaluating the project. Round it up or down to the nearest whole percentage.

d) what is the project's annual operating cash flow

e) what is the NPV for the project.