Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The Coles (OP) considers an investment project. The table below sets out the details of the project: Annual sales 15m Annual variable costs 5m Annual

The Coles (OP) considers an investment project. The table below sets out the details of the project:

Annual sales

15m

Annual variable costs

5m

Annual fixed costs

2m

Annual depreciation

1m

Investment cost

50m

Working capital

30% of annual sales

The beta of the future cash flow

1.3

The duration of the project

Ten years

The risk-free interest rate is 3%, and the average return of the market index is 7%. The corporate and investor tax rates are zero. The RA Co currently has a debt/equity ratio of 1 and a weighted average cost of capital (WACC) of 7%.

  1. What is the cost of capital of the investment?

(5 marks)

  1. Estimate the cost of the working capital investment.

(10 marks)

  1. Estimate the net present value of the project. Is the project desirable?

(15 marks)

  1. Carry out a sensitivity analysis with a plus/minus 10% change in the quantity of goods/services sold during the projects lifespan. Interpret the output of the sensitivity analysis.

(10 marks)

  1. Discuss the concepts of competitive advantage and economic rent and how they could help decide to go ahead with the project.

(10 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Handbook Of Digital Media And Communication

Authors: Leah Lievrouw ,Brian Loader

1st Edition

036761233X, 978-0367612337

More Books

Students also viewed these Finance questions