You have recently been appointed executive in charge of finance for Spoofle (Pty) Ltd. The company is considering investing in the production of UPS machines and related products for its clientele. The junior accountant has provided you with the following information:

In addition, the junior accountant informs you of the following:

• All cash flows and profits forecasts were prepared in present terms and can be adjusted based

on inflation in respective years;

• Fixed overheads are expected to suffer inflationary increases of 5% per year;

• Materials and labour costs are expected to increase by 10% per annum;

• Other operating costs are expected to increase by 4% per year;

• The tax rate is 28% and payable in the year profits are made;

• The company is financed by 75% equity and 25% debt, with market values of R75m and R25m

respectively. The company has an equity beta of 1,2. The rate on Treasury bills is 5% and

considered to have no risk. The market risk premium is 7,5%. The company’s after-tax cost of

debt is 6%;

• The following assumptions were made in preparing the financial information:

o Profits are similar to cash flows for the purposes of this project evaluation;

o All receipts and payments arise at the end of the year to which they relate, except for

the project’s initial outlay of R30m, which is to be paid immediately; and

o Other operating costs figures have already adjusted for tax capital allowances and

noncash depreciation adjustments. The noncurrent asset bought for the project has no

residual value.

Required:

Given the information above, calculate the following:

a. Weighted average cost of capital.

b. Net present value of the proposed project.
 

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Details Sales Materials Labour Other variable overheads Fixed overheads Other operating costs Year 1 R'000 35 000 5 350 10 700 500 12 000 3.000 Year 2 R'000 49 000 7.500 15 000 600 ? 3100 Year 3 R'000 53 200 9 000 18 000 650 ? 3200 Year 4 R'000 57 400 10 050 21 000 700 ? 3400 Year 5 R'000 55 200 9 000 18 000 750 ? 3 300 Details Sales Materials Labour Other variable overheads Fixed overheads Other operating costs Year 1 R'000 35 000 5 350 10 700 500 12 000 3.000 Year 2 R'000 49 000 7.500 15 000 600 ? 3100 Year 3 R'000 53 200 9 000 18 000 650 ? 3200 Year 4 R'000 57 400 10 050 21 000 700 ? 3400 Year 5 R'000 55 200 9 000 18 000 750 ? 3 300

Answer rating: 100% (QA)

a Weighted Average Cost of Capital WACC WACC EV Ke DV Kd 1 Tc Where E Market value of equity V Total market value of equity ... View the full answer