Read the case study$/$ scenario below and answer the questions based on the

case study.

Miles Morales Limited $($MM$)$ is a company listed on the Johannesburg Stock Exchange

$($JSE$).$ MM is in the process of evaluating whether to invest in a new business venture.

Below is all relevant information pertaining to the project:

$$ The cost of the new project is R$20$ million.

$$ The revenue expected to be generated per annum is R$12$ million. This will increase

in line with inflation from the end of year $1$ of the project.

$$ The variable costs are expected to be generated per annum is R$6$ million. These

will increase in line with inflation from the end of year $1$ of the project.

$$ The fixed costs are made up of the following:

Description Amount $($R$)$

Head Office Allocation $200000$

Depreciation $100000$

Rental space $($MM has capacity in their current

warehouse$)$

$200000$

$$ The project will be finance by way of a new loan for R$20$ million, repayable in $10$

years$$ time. Interest on the loan is $12\%$ per annum compounded monthly.

Instalments are payable at the end of each month.

$$ After $5$ years, this project will generate a pre$-$tax cash flow of R$2\mathrm{.}5$ million into

perpetuity.

Additional information:

$$ The company$$s tax rate is $27\%.$ All costs are fully deductible and there is no wear

and tear pertaining to this project.

$$ All cashflows are earned evenly throughout the financial year.

$$ The company uses a nominal WACC rate of $15\%.$

$$ Inflation is expected to be $7\mathrm{.}5\%$

required

$1\mathrm{.}1$ Calculate the net present value of this project