E.C. The following are project requirements and costs related to the new project:
o  Land will be obtained on a lease basis for annual rental payment of Br800,000 payable at the beginning of each year over term of the lease. The lease satisfies the conditions for IFRS 16 lease contract & the lease term is 6 years. The costs of constructing fences and other infrastructures is Br1,500,000 with no residual value. An office building will also be constructed at a cost of Br1,200,000 with no residual value.
o  Proposed number of hives: 600 (acquires for Br 3,000 each hive including bees). The salvage value of bee hives is Br 150,000. Site preparation costs (to be added to cost of hives) total Br240,000.
o  Production equipment's will cost the PLC Br520,000 with salvage value of Br 40,000.
o  The cost of office equipment's and furniture totals Br360,000 with no residual value.
o  Number of people to be employed... 25 (the average wage of each employee is Br 7,000 per month and becomes Br 9,000 per month starting from year 4).
o  Raw materials... Sugar and other carbohydrate products..... 2 kilogram per hive per day for 365 days a year. The cost per Kilogram of these raw materials will be Br 50 from year 1 to year 3 and Br 55 from year 4 to year 6.
o  Cleaning supplies worth Br 7,000 per month.
o  Other Selling and other administrative expenses total Br 100,000 per year.
o  Production:
o  12,000 kilograms of honey per month (Sold for Br 200 per kilogram in year 1 and will increase by 10% each year starting from year 2)
o  6,000 kilograms of byproduct for wax manufacturing per month (sold for Br 30 per kilogram in year 1 and will increase by 20% each year starting from year 3)
o  The project needs the following minimum balances on hand throughout the life of the project:
 
 -cash balance of Br150,000 per month  
 -Raw materials inventory of 30 days.
 -Cleaning Supplies of 3 months  Preparatory study costs: Br 90,000 (Br 30,000 is already spent). Such costs will be amortized over 6 years on straight line basis.
o  The PLC will finance this project using target capital structure of 60% bank loan and 40% equity. The bank loan will be obtained at 14% annual interest rate. Interest will be paid at the end of each year & the principal will be repaid after 6 years. Equity will be raised by issuing Br1,000 par value shares. The market required rate of return from equity, risk free rate and beta (risk measure) will be 16%, 4% and 1.5 respectively.
o  Tax rate is 30%.
o  Project's life is assumed to be 6 years.
o  The useful life of property, plant & equipment items is assumed to be the project's life and straight line method of depreciation is to be used.
o  The project's discount rate will be the weighted average cost of capital.
o  Annual interest payments on debt used to finance this project would be a tax deductible expense.
o  All purchases and sales are on a cash basis.

Required:

 -Calculate the Weighted Average Cost of Capital (WACC) for the project. Hint: Use CAPM to calculate cost of equity.
 -Determine the investment cost of the project  
 -Determine the relevant cash inflows of the project for each of the six years
 -Determine the relevant cash outflows of the project for each of the six years
 -Prepare the projected income statement for each of the six years  
 -Determine the net cash flows of the project for each of the six years
 -Evaluate the feasibility of the project using
 -Payback period method where the acceptable time limit is 2 years
 -Average Accounting Rate of Return where the required AARR is 40%  
 -NPV
 -Profitability Index
 -IRR
 -Discounted Payback Period where the acceptable time limit is 3 years

Answer rating: 100% (QA)

Stepbystep explanation 1 For WACC Cost of debt 141tax 14130 98 ... View the full answer