Question$1$

KBS Plc is evaluating a new project with a project life of $5$ years.

The initial investment outlay is $1,000,000$ to purchase fixed assets that will be depreciated using the diminished balance method at the annual rate of $20\%.$ At the end of year $5,$ the initial investment has no salvage value. Assuming no opportunity costs, the project is expected to generate the following annual gross profits:

Year gross profit

$1$

$250,000$

$2$

$300,000$

$3$

$350,000$

$4$

$400,000$

$5$

$450,000$

Perpetual cash flows after year $5$ are assumed to be growing at a constant rate of $2\%.$ The company's cost of equity $($Re$)$ is $12\%.$ The pre$-$tax cost of debt $($Rd$)$ is $7\%.$ The company's target debt to equity ratio $($D$/$E$)$ for this project is $1/3.$ The company plans to use debt financing for the project consistent with the target D$/$E ratio throughout the project life. The corporate tax rate $($Tc$)$ is $30\%.$ Project's risk profile is similar to the company's average risk profile.

Requirement:

$1)$

Calculate the project's value using the APV, FTE, and WACC methods $($the calculated value may vary between these methods$).$ Explain your calculated project value based on each of the three methods.

$2)$

Assuming that project$$s risk profile is different from the company$$s average risk profile, the market risk premium is $8\%$ and the risk$-$free rate is the same as the pre$-$tax cost of debt, what is the asset beta of KBS Ltd$.$