Question
You have been recently appointed executive in charge of finance for RavenClaw (Pty) Ltd. The company is considering investing in the production of solar geysers
You have been recently appointed executive in charge of finance for RavenClaw (Pty) Ltd. The company is considering investing in the production of solar geysers and related products for their installation. The junior accountant has provided you with the following information: Note; You can put any assumable Value for answer. In addition, the junior accountant informs you of the following: All cash flows and profits forecasts were prepared in present terms and can be adjusted based on inflation in respective years; Sales, variable overheads and fixed overheads are expected to suffer inflationary increases of 5% per year; Materials and labour costs are expected to increase by 10% per annum; Other operating costs are expected to increase by 4% per year; The tax rate is 28% and payable in the year profits are made; The company is financed by 75% equity and 25% debt, with market values of R75 m and R25 m, respectively. The company has an equity beta of 1,2. The rate on Treasury bills is 5% and considered to have no risk. The market risk premium is 7,5%. The companys after-tax cost of debt is 6%; The following assumptions were made in preparing the financial information: o Profits are similar to cash flows for the purposes of this project evaluation; o All receipts and payments arise at the end of the year to which they relate, except for the projects initial outlay of R30 m which is to be paid ie immediately; and o Other operating costs figures have already adjusted for tax capital allowances and noncash depreciation adjustments. The noncurrent asset bought for the project has no residual value. Required: Given the information above, calculate the following: a) Profits for the periods (20 marks) b) Weighted average cost of capital (4 marks) c) Net present value of the proposed project (13 marks) d) Recommendation on the acceptance or rejection of the project with justifications (3 marks) e) Determine what the discount rate would be if the net present value is to approximately equate zero (10 marks)
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