Sainsbury's is currently evaluating a new project to produce canned coffee drinks. The project will require an
Question:
Sainsbury's is currently evaluating a new project to produce canned coffee drinks. The project will require an initial outlay of £40m on production machinery and other costs. The project is expected to have a three-year life span, and the projected cash flows associated with the project are displayed in table 1 below: The project has a debt capacity of 50% of the cost of the project, with an annual interest charge of 7.50%. The company currently has £10m of retained earnings available for this project, and the remainder would potentially be financed with a rights issue. The rights issue incurs additional costs of 2% of the amount raised, and the debt issuance is a bit cheaper, costing 1%, where both issue costs are tax deductible
You will need to research the beta needed to complete Table 2 above.
The company believes this will be a successful project and will help to distinguish them from their competitors. However, they would like you to evaluate the project using different methods and present a proposal to the investment committee for approval
QUESTION: Using NPV, evaluate the project using the Weighted Average Cost of Capital (WACC), assuming a 50% debt