Question 3 [ Capital budgeting] XYZ Inc. proposes to launch a new product. Cost of plant and machinery and related equipment $ 1,000,000. The project development team has developed the following details: 1. 50% capex is to be financed by borrowings @ 6% interest p.a. and remaining 50% by way of equity ( retained earnings). The company paid dividend of $ 6, market price of share $ 100, historical dividend growth rate 5%. 2. Expected sales and selling price over next 5 years : Year 1 2 3 4 5 100000 110000 120000 130000 120000 Sales Qty Selling price pu ($) 15 18 20 22 22 3. Variable cost is 40% of sales 4. Fixed costs over next 5 years : 1 2 3 4 inn Year Fixed costs ($) 200000 210000 215000 220000 225000 5. Depreciation on Plant, Machinery & Equipment : Straight line basis 6. Tax Rate : 30% 7. Working capital : 30% on sales. Working capital is financed by taking working capital loan from Bank @ 5%. Any incremental working capital is financed from surplus project cash flows. Required: Develop project cash flows Work out weighted average cost of capital (WACC) Calculate Payback period , IRR and NPV of the project. The Company accepts project if payback period is 3 years or less