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Company A is currently evaluating a new project to produce organic and vegan food. The project will require an initial outlay of 65m and is expected to have a three-year life span. The projected cash flows associated with the project are displayed in the table:

Company potential Projects Cash flow Information

All figures in m202120222023

Sales

COGS

85.0

(46.8)

87.0

(47.9)

92.0

(50.6)

Gross Profit

Operating Expenses

38.3

(2.0)

39.2

(2.5)

41.4

(3.0)

EBITDA

Tax Expenses

36.3

(6.3)

35.7

(6.4)

37.4

(6.7)

EBIAT28.929.230.7

CAPEX

Investment in Working Capital

2

0

3

0

2

5

The project has a debt capacity of 50% of the cost of the project, with an annual interest charge of 5%. 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 issues are tax deductible.

Additional Information

Key Rates and FiguresRisk-free Rate (irf) ?Project Cost of Debt (id) pre-tax 5.00%Market Premium ?Marginal Corporate Tax Rate 25.00%Company A unlevered Beta () 0.4

Required:

The company believes it will be a successful project and will help to distinguish it from its competitors. However, they would like you to evaluate the project using different methods and present a proposal to the investment committee in order for them to approve it.

a) Company A is considering financing the project with 50% debt. Appraising the project using the Internal Rate of Return (IRR) and Net Present Value (NPV). Use Capital Asset Pricing Model (CAPM) to compute the discount rate and calculate the project's Cash Flow.

b) Evaluate the project using Adjusted Present Value (APV).

c) Assuming the project's market risk is similar to the overall market risk of the firm, revise the projects NPV using the Weighted Average Cost of Capital (WACC). Contrast the answer to the number (a).

d) Compare the methods used and give a final recommendation to the investment committee. Make sure you critically evaluate all methods and discuss other risk factors that were not included in the analysis.

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