Suppose Britvic plc, the British soft drinks company, is considering investing in a new production facility. (Britvic produces its own brands and is also the licensed producer of PepsiCo brands in Great Britain and Ireland. The company is a constituent of the FTSE250 index). The project requires an initial investment of 27m. The facility is expected to generate cash flow of 4m in the first year, and cash flow is forecast to grow at a rate of 6% per year. The project life is 10 years, and at the end of the project the equipment will have no residual value. The cost of capital for the company is estimated to be 9.8% (see Question 3). Explain the net present value (NPV) approach, calculate the NPV of the investment, and comment on the value you obtain. (b) Compute the internal rate of return for the project, and the payback period. Compare and contrast these methods with the net present value method.

Question 3 The estimated beta for Britvic is 0.94, estimated using monthly returns on the shares of Britvic and the FTSE All-share stock market index (for the period November 2017 to October 2022), and the methods explained in Units 3 and 4 and in your key text by Hillier et al. The yield on UK government bonds with maturity of at least 10 years is 3.50% (9 November 2022, markets.ft.com). The expected market risk premium for the UK is 6.65% (Hillier et al, Table 9.3). Explain the capital asset pricing model, and use the capital asset pricing model to obtain the estimated cost of capital for Britvic. Comment on the value you obtain.