Please do your answers on an Excel spreadsheet, using one tab per question. The alternative is to use pen and paper and submit these as a PDF (but this is not ideal.)

2. Project assessment

Rumpole Ltd is contemplating an 8-year project that will have sales that will grow 6 percent per year from a year 1 figure of $75.5 million and cash costs that will grow at 5 percent a year from a year 1 figure of $53 million. Machinery that needs to be purchased will cost $120 million and will last the 8 years and is depreciated by the straight-line method to zero. However this equipment will realise $15 million (pre-tax and in todays dollars) when resold at the end of the project. The annual inflation rate is expected to be 3 percent and the Rumpole Ltd project has a WACC of 8 percent in real terms (as distinct from nominal); and the corporate tax rate and capital gains tax rate are both 28 percent. The NWC required each year is 10 percent of expected annual sales.

Required:

1. What is the nominal after-tax cash flow from operations (CFAT) for each of the eight years? (4 marks)
2. What is the real depreciation tax shield for each of the eight years? (3 marks)
3. What is WACC in nominal terms? (2 marks)
4. What is the annual investment (and its timing) in nominal terms each year for the net working capital requirement? (5 marks)
5. What is the present value of this project AND would you accept or reject it? (6 marks)

Total: 20 Marks