QUESTION 2

A hypothetical company, Brandon Inc is in the business of manufacturing spare parts for automobiles. The company is considering an investment appraisal project about which the following information is available:

i. The investment outlay on the project will be £ 100m. This consists of £ 80m on plant and machinery, and £ 20m on net working capital. The entire outlay will be incurred at the beginning of the project.

ii. The project is expected to generate revenue of £ 60m every year for 5 years and is expected to cost £ 30m each year (including all item costs). 

iii. Plant and machinery will be depreciated at the rate of 25% year as per written down value method. Effective tax rate is 30%.

iv. The life of the project is expected to be 5 years. At the end of 5 years, fixed assts will fetch a net salvage value of £ 25m whereas net working capital will be liquidated at its book value of £ 20m.

v. The project will be financed with £ 45m of equity capital, Rs 5m of preference capital, and Rs 50m of debt capital. Assume the cost of capital of the project is 15%.

Compute the following:

a.      Operating cash flows of the project.

b.      Terminal cash flow of the project.

c.       Net Present Value (NPV) of the project.

d.      Identify if we should go ahead with this project.