Question
Samsidu Plc. is a company operating in the mining industry. The company is considering investing in a five-year project which requires a 500,000 initial investment.
Samsidu Plc. is a company operating in the mining industry. The company is considering investing in a five-year project which requires a 500,000 initial investment.
Sales for the first year are estimated at 500,000, then grow by 10% per year afterwards. Costs (excluding depreciation) of the first year are forecast at 200,000, then increase by 5% per year for the rest of the project.
Working capital needs to be maintained at 10% of next year's sales. There will be no salvage value at the end of the project. The company uses straight-line method for depreciation. The tax rate is 35%.
The cost of debt is 10% and cost of equity is 15%. Of the total market value of the company, 60% is debt and the rest is equity.
Questions:
a.What is the company's weighted average cost of capital (WACC) ?
b.Prepare a spreadsheet to summarize the net cash flow for each year of the project.
c.Using the WACC estimated in question (a) above as the discount rate, calculate the project's NPV. Based on your calculation, should the company invest in this project?
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