(a) A very successful and profitable firm is currently considering a new, large investment project that...

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(a) A very successful and profitable firm is currently considering a new, large investment project that could be initiated at the start of 2021. The project involves the acquisition of a plant, which requires an initial outlay of £420 million. Although it is not clear for how long the project will last, there is an expectation that over the first six years of the project its initial capital investment should be fully depreciated. The firm's accountants have prepared the following projections on expected sales and cash flows, and information on the cost of capital of the company: Table 1. Sales and cash flow projections 2021 2022 2023 2024 2025 2026 Sales 110 148 151 135 142 EBITD 60 75 80 70 Depreciation (70) (70) (70) (70) (70) EBIT (10) 5 10 0 Tax expense 2 (1) (2) 0 EBIAT (8) 4 8 0 £ 2000 145 75 (70) 5 (1) 4 Table 2. Cost of capital Risk-free Rate (Rf) 1% Project Cost of Debt (Rd) 5% 5% Marginal Corporate Tax Rate (Tc) 20% 1.1 Market Risk Premium Asset Beta of comparable companies Required: Carry out the following calculations, always assuming that cash flows occur at the end of their respective years: (i) Estimate the NPV of the investment project at the start of 2021 if it is 100% financed with equity and assuming that the project is terminated at the end of 2026. Show and explain your calculations and comment on your findings. (10 marks) (a) A very successful and profitable firm is currently considering a new, large investment project that could be initiated at the start of 2021. The project involves the acquisition of a plant, which requires an initial outlay of £420 million. Although it is not clear for how long the project will last, there is an expectation that over the first six years of the project its initial capital investment should be fully depreciated. The firm's accountants have prepared the following projections on expected sales and cash flows, and information on the cost of capital of the company: Table 1. Sales and cash flow projections 2021 2022 2023 2024 2025 2026 Sales 110 148 151 135 142 EBITD 60 75 80 70 Depreciation (70) (70) (70) (70) (70) EBIT (10) 5 10 0 Tax expense 2 (1) (2) 0 EBIAT (8) 4 8 0 £ 2000 145 75 (70) 5 (1) 4 Table 2. Cost of capital Risk-free Rate (Rf) 1% Project Cost of Debt (Rd) 5% 5% Marginal Corporate Tax Rate (Tc) 20% 1.1 Market Risk Premium Asset Beta of comparable companies Required: Carry out the following calculations, always assuming that cash flows occur at the end of their respective years: (i) Estimate the NPV of the investment project at the start of 2021 if it is 100% financed with equity and assuming that the project is terminated at the end of 2026. Show and explain your calculations and comment on your findings. (10 marks)

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To estimate the NPV Net Present Value of the investment project we need to discount the expected cas... View the full answer