Sainsburys 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
QUESTION: Sainsbury’s is considering financing the project with 40% debt. Using Adjusted Present Value (APV), value the project. (Assume the same level of debt is held until the end of the project. Do not consider the repayment of the debt principal in any of the valuations.)