Answer Happy

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 conceming 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 3% The market data available are as follows: The risk-free rate of return The average return on the market index 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 £25m £5m New equity issued New debt issued The annual revenue flow year 1 through 10 The annual cost year I through 10 The beta-risk of the project The beta-risk of total debt after the issue £6.5m £1.5m 1.5 0.4 Your report should address the following questions: a) What is the cost of capital for the project? b) What is the net present value of the investment? (5 marks) (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)