Question :

Calculate net present value of the project assuming that initial investment is equal to $11 million using WACC, APV and FTE methods. What would be your recommendation?

The Case Mr Ramli was a founder of business that specializes in the plastic moulding industries. His business has been established in the market since mid-1990s as a privately owned company. The company has been grown steadily over the years with all the profits being reinvested in the business. Recently, he intended to expand his company by launching a new plastic moulding line. Thus, he needed to calculate the net present value (NPV) of the projected cash flows to determine the attractiveness of the new expansion. His key concern was determining a reasonable discount rate to apply to cash flows in order to calculate the project's net present value (NPV). Mr Ramli approached a consultant friend to look into the comparable businesses in the same industry's cost of capital. In this case, the basic idea is that businesses in the same sector often have similar clients, activities, and properties, thus they face similar business risks and should have similar capital costs. The first step to value the project, Mr Ramli prepared projected earnings for the coming five years. He also prepares projected balance sheet and estimated cash flow. Although the growth rate over the 5-years forecast period was high, he felt that the growth rate will be stabilised at 3 percent per year after the initial high growth of 5 percent at the initial high growth phase. His main concern was to find a suitable discount rate to be applied to cash flows to ascertain the NPV of project.