The following financial information relates to NIC Ltd, a manufacturer of a special chemical used in...

  

Transcribed Image Text:

The following financial information relates to NIC Ltd, a manufacturer of a special chemical used in the production of fertilizer in Zambia. Historical information for the past four years. Year 1 2 3 4 (current) K'M K'M K'M K'M Sales revenue 1,650 1,715 1,799 2,045 Operating costs 750 899 1,100 1,310 Tax allowable depreciation 151 190 245 297 Capital expenditure Interest cost Dividend 46 200 250 300 350 45 45 45 45 60 65 69 72 Other information: Issued ordinary shares 50ngwee Government treasury bills yield Market return Corporate tax 10% Loan notes issued at par value of K1,000 with 4 years to maturity K500million 7% 15% 30% K450million In order to maintain the required level of production, NIC Ltd is considering making a significant capital investment of K900million to continue with the existing business. If the investment is not undertaken, the business operation will wind up. The operating costs includes depreciation on non-current assets which is equivalent to the tax allowable depreciation. Market Analysts have estimated that the average equity beta of the quoted Chemicals manufacturing companies at Lusaka stock exchange is 1.3. The current share price is 110ngwee per share. The fixed costs are expected to grow by 2.5% annually. Sales and operating costs (including depreciation) are expected to grow for the next four years by 5% and 4% per year respectively. Assume cash flows occur at the end of the relevant period. Required: a) Evaluate the proposed capital investment using the Net Present Value method. b) Evaluate the proposed investment using the Internal Rate of Return method. The following financial information relates to NIC Ltd, a manufacturer of a special chemical used in the production of fertilizer in Zambia. Historical information for the past four years. Year 1 2 3 4 (current) K'M K'M K'M K'M Sales revenue 1,650 1,715 1,799 2,045 Operating costs 750 899 1,100 1,310 Tax allowable depreciation 151 190 245 297 Capital expenditure Interest cost Dividend 46 200 250 300 350 45 45 45 45 60 65 69 72 Other information: Issued ordinary shares 50ngwee Government treasury bills yield Market return Corporate tax 10% Loan notes issued at par value of K1,000 with 4 years to maturity K500million 7% 15% 30% K450million In order to maintain the required level of production, NIC Ltd is considering making a significant capital investment of K900million to continue with the existing business. If the investment is not undertaken, the business operation will wind up. The operating costs includes depreciation on non-current assets which is equivalent to the tax allowable depreciation. Market Analysts have estimated that the average equity beta of the quoted Chemicals manufacturing companies at Lusaka stock exchange is 1.3. The current share price is 110ngwee per share. The fixed costs are expected to grow by 2.5% annually. Sales and operating costs (including depreciation) are expected to grow for the next four years by 5% and 4% per year respectively. Assume cash flows occur at the end of the relevant period. Required: a) Evaluate the proposed capital investment using the Net Present Value method. b) Evaluate the proposed investment using the Internal Rate of Return method.