The Chief Finance Officer (CFO) of Adelpha Ltd, a UK-based manufacturer of small consumer goods, asks you to provide a r

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The Chief Finance Officer Cfo Of Adelpha Ltd A Uk Based Manufacturer Of Small Consumer Goods Asks You To Provide A R 1 (73.05 KiB) Viewed 45 times

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 retum The average return on the market index 3% 7% The investment project's data are as follows: The project's investment cost The tangible part of the investment (equipment) Annual depreciation of equipment The expected resale value of equipment in year 10 £30m £20m £2m £4m New equity issued New debt issued £25m £5m £6.5m £1.5m The annual revenue flow year 1 through 10 The annual cost year 1 through 10 The beta-risk of the project The beta-risk of total debt after the issue 13 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)