Sainsburys is currently evaluating a new project to produce canned coffee drinks. The project will require an initial outlay of 40m on production machinery and other costs. The project is expected to have a three-year life span, and the projected cash flows associated with the project are displayed in table 1 below:

The project has a debt capacity of 50% of the cost of the project, with an annual interest charge of 7.50%. The company currently has 10m of retained earnings available for this project, and the remainder would potentially be financed with a rights issue. The rights issue incurs additional costs of 2% of the amount raised, and the debt issuance is a bit cheaper, costing 1%, where both issue costs are tax deductible

You will need to research the beta needed to complete Table 2 above. Required: The company believes this will be a successful project and will help to distinguish them from their competitors. However, they would like you to evaluate the project using different methods and present a proposal to the investment committee for approval.

QUESTION: How would your evaluation change if the machinery manufacturer offered to sell you the production machine with a three-year 35m 7.5% loan (subject to 1% issue costs)? Assume the remainder of the initial outlay is equity. Discuss the benefits and disadvantages of the APV method.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortisation EBIT: Earnings Before Interest and Taxes EBIAT: Earnings Before Interest and After Taxes For simplicity, taxes are calculated assuming no interest expense Annual capital expenditures are in addition to the initial outlay, and assumed to cease at the end of the project Table 2; Key Rates and Figures \begin{tabular}{lc} Risk-free rate (irf) & 1.30% \\ Project cost of debt (id) pre-tax & 7.50% \\ UK market premium & 7.00% \\ UK marginal corporate tax rate & 20.00% \\ Britvic plc equity beta () & ? \\ \hline \end{tabular} EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortisation EBIT: Earnings Before Interest and Taxes EBIAT: Earnings Before Interest and After Taxes For simplicity, taxes are calculated assuming no interest expense Annual capital expenditures are in addition to the initial outlay, and assumed to cease at the end of the project Table 2; Key Rates and Figures \begin{tabular}{lc} Risk-free rate (irf) & 1.30% \\ Project cost of debt (id) pre-tax & 7.50% \\ UK market premium & 7.00% \\ UK marginal corporate tax rate & 20.00% \\ Britvic plc equity beta () & ? \\ \hline \end{tabular}