Photochronograph Corporation (PC) manufactures time series photographic equipment. It is currently at its target debt–equity ratio of 1.3. It is considering building a new £45 million manufacturing facility. This new plant is expected to generate after-tax cash flows of £5.7 million in perpetuity. There are three financing options:
• A new issue of equity. The required return on the company’s equity is 17 per cent.
• A new issue of 20-year bonds. If the company issues these new bonds at an annual coupon rate of 9 per cent, they will sell at par.
• Increased use of trade payables financing. Because this financing is part of the company’s ongoing daily business, the company assigns it a cost that is the same as the overall firm WACC. Management has a target ratio of accounts payable to long-term debt of 0.20.
(Assume there is no difference between the pre-tax and after-tax accounts payable cost.)
What is the NPV of the new plant? Assume that PC has a 28 per cent tax rate.