The Chief Finance Officer (CFO) of Adelpha Ltd, a UK-based manufacturer of small consumer goods, asks you to provide a report for the board concerning a new product line. The new line has a lifespan of 10 years, and the CFO hopes that it will contribute substantially to strengthening the firm's balance sheet. Currently, Adelpha has assets worth 40m.

The table below sets out the known details of the firm's balance sheet:

Value Cost of capital

Total assets 40m 12%

Debt 30m 6%

Equity 10m ?

The market data available are as follows:

The risk-free rate of return 3%

The average return on the market index 7%

The investment project's data are as follows:

The project's investment cost 30m

The tangible part of the investment (equipment) 20m

Annual depreciation of equipment 2m

The expected resale value of equipment in year 10

4m New equity issued 25m

New debt issued 5m

The annual revenue flow year 1 through 10 6.5m

The annual cost year 1 through 10 1.5m

The beta-risk of the project 1.5 T

he beta-risk of total debt after the issue 0.4

Your report should address the following questions:

a) What is the cost of capital for the project? (5 marks)

b) What is the net present value of the investment? (20 marks)

c) What is the new cost of capital for the company after the investment? (10 marks)

d) What is the cost of equity capital before and after the investment? (15 Marks)