A 5-year project will require an investment of $100 million. This comprises of plant and machinery worth $80 million and

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A 5-year project will require an investment of $100 million.
This comprises of plant and machinery worth $80 million and a net
working capital of $20 million. The entire outlay will be incurred
at the project’s commencement. Financing for the project has been
arranged as follows:
80,000 new common shares are issued, the market price of which
is $500 per share.
These shares will offer a dividend of $4 per share in year 1,
which is expected to grow at a rate of 9% per year for an
indefinite tenure.
Remaining funds are borrowed by issuing 5-year, 9% semi-annual
bonds, each bond having a face value of $1,000.
These bonds now have a market value of $1,150 each.
At the end of 5 years, fixed assets will fetch a net salvage
value of $30 million, whereas the net working capital will be
liquidated at its book value. The project is expected to increase
revenues of the firm by $120 million per year. Expenses, other than
depreciation, interest and tax, will amount to $80 million per
year.
The firm is subject to a tax rate of 30% Plant and machinery
will be depreciated at the rate of 25% per year as per the
written-down value method. You are required to:
7. Compute the Terminal cash flow. (1 mark)
8. Compute the FCF for years 1 through 5 (1 mark)
9. Compute the project’s NPV and IRR (3 marks)
10. Should the project be accepted or rejected? (1 mark)