Question 1 (20 marks) A 5-year project will require an investment of $100 million. This comprises of plant and machinery

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Question 1 (20 marks) 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-downvalue method.
You are required to:
1. Compute the OCF for years 1 through 5 (3 marks)
2. Compute the Terminal cash flow. (1 mark)
3. Compute the FCF for years 1 through 5 (1 mark)
4. Compute the project’s NPV and IRR (3 marks)
5. Should the project be accepted or rejected? (1 mark)