The De Facto Corporation is planning an investment in the consumer electronics market. The corporation already has an established brand recognition in this market, and believes it can capture 5% of the whole market. Table 1 sets out data on the relevant consumer electronics market.

Table 1: Consumer electronics market (numbers in millions) Annual sales revenues 100,000 Annual costs (variable) 50,000 Annual growth in sales/costs 3% Beta of sales and cost cash flows 1.5

Table 2 sets out data on De Facto Cos investment project. Table 2: De Facto Cos investment project Investment cost in year 0 5.9bn Annual fixed costs 1bn Annual sales revenues 4.5% of total market Annual variable cost 4% of total market Working capital 20% of next years sales Duration 10 years The risk-free interest rate is 3% and the average return on the market index is 7%.

a. What is the relevant cost of capital for De Facto Cos investment appraisal analysis? (5 marks)

b. What is the present value of De Facto Cos future sales revenues? (10 marks)

c. What is the present value of De Facto Cos future variable and fixed costs? (10 marks)

d. What is the net present value of De Facto Cos working capital investment? (10 marks)

e. What is the net present value of De Facto Cos total investment in the consumer electronics market? (10 marks)

f. Why do you think that De Facto Cos sales revenues are 4.5% of the total market but only 4% of the total variable cost? (5 marks)