Question 5 Pak Foods Ltd. is considering a project of new product line that requires the initial cost of Rs. 15 million. The company is considering to raise the capital from debt and equity financing (no preferred stock). The target capital structure is 60% equity and 40% debt. The interest rate on new debt is 8.00%, and the cost of equity is 15.00%, and the tax rate is 40%. (12 marks)

The project has an economic life of 7 years and has the following projected cash flow data.

Year 0 1 2 3 4 5 6 7__ Cash flows Rs. (15m) Rs.1.0m Rs.1.75m Rs.3.0m Rs.(4.5m) Rs.3.0m Rs.2.2m Rs.20m