Question 2

Green Solutions Inc is a company that is committed to environmental sustainability and is now considering a new project to develop an eco-friendly recycling plant. Green Solutions Inc has a strong reputation as an environmentally responsible company, and any project it undertakes must align with this reputation.

The proposed recycling plant is in line with the company's values, as it aims to reduce waste and promote sustainability. The plant will require a significant investment in new technology and infrastructure, as it will need to utilise advanced recycling techniques to sort and process recyclable materials efficiently.

However, the company is aware that such a project will require a significant amount of capital expenditure, including the cost of new equipment, infrastructure, and technology. Therefore, the company needs to assess the feasibility of the project and determine whether the expected benefits outweigh the costs.

To evaluate the feasibility of the project, Green Solutions Inc has gathered a variety of information and estimates as follows:

	1	2	3	4	5
Net cash flow before tax ( 000s)	310	330	380	410	430

• Green solutions Inc has already spent 110,000 in R&D of this new project.
• Disposal value at the end of 5 years: 150,000
• The company pays corporation tax at the rate of 19%. The net cash flow above is based on current prices. The finance team expects the net cash flow above (and the residual value) will be subject to a 5% inflation rate per year.
• The initial investment required is 1 million and will be paid out immediately. There is no capital allowance for this investment and tax is to be paid one year in arrears.
• Green Solutions Inc uses the real weighted average cost of capital as the discount rate. This is 9.5% and the general rate of inflation is 5%.

Required:

• a.Provide Green Solutions Inc with a Net Present Value (NPV) analysis of the project and make a recommendation. The analysis should be in good form and show workings. Round to the nearest whole pound and percentage. Use discount factors to four decimal places.
• b.Calculate the payback period of the project.
• c.The Chief Financial Officer (CFO) of Green Solutions Inc has informed you that there is an additional investment opportunity available called Project waste treatment. However, there is a capital limit of 1.5 million for investments in year 0. Both this project and the previously mentioned project are divisible. Below is the relevant information for this new investment opportunity. (10 marks) Project Waste Treatment Capital investment at year 0 (): 800,000 Present value of cash flows generated (): 887,892 NPV: 87,892 Using Profitability Index, calculate the maximum NPV that can be generated from investing 1.5 million.
• d.Discuss the non-financial factors that Green Solutions Inc should consider when evaluating the feasibility of the proposed eco-friendly recycling plant project, and explain how these factors can impact the success of the project.