ABCLimited ("ABC") is a bigcompany listed on USstock market. Ithas been

evaluating an investment proposal to manufacture Product XKX.

Below showsthe investment proposal information for evaluation.

Expected Operating Cash Inflows Before Tax at the ended of Dec 30, each year areshownbelow.

Year $'000

20013,950

2002 4,520

2003 5,280

2004 6,340

A new machine for the project will be purchased at a cost of $2.5 million for the initial set up. Capital

allowances for tax purpose are available on the initial investment in machinery on a straight line basis with a scrap value of $300,000.

Initial investment of working capital of $100,000 would be recovered half of the amount at the end of

the project. Corporate tax rate is 20% which it is payable one year in arrears.

ABCplans to use the Weighted Average Cost of Capital (WACC) to evaluate the project. The financial information of the company as at 1 January 2001 is as follows:

$'000

Ordinary shares, each $2.00 35,000

Reserves 12,000

8% preference shares, each $0.50 10,000

6% annual coupon bonds due in 5 years, each $1,000 22,000

The current share price of ABCis traded at $10.50. The company has also recently paid out a

dividend of $1.02 in Dec 2000. Historical dividend paid record is as below.

2000 $1.02

2009 $0.90

2008 $0.85

2007 $0.80

2006 $0.75

Other sources of finance are preference shares and coupon bonds. The preference shares have a

price of $0.80 while the bonds are trade at $1,020.

Show all the workings clearly

a.

Calculate ABC's Weighted Average Cost of Capital WACC (round off to integer in percent).

b.

Compute the Net Present Value (NPV) of the 4-year project.

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