Relevant Cash Flows for Project

ANSWER TO QUESTION 1
The relevant cash flows to be considered for the project that are relative to the old
plant are presented as follows.
ANNUAL CASH FLOWS Years
2016 2017 2018 2019 2020
Sales Quantity (millions) 15 18 20.7 22.5 26.2
Sales Price 1.29 1.33 1.36 1.40 1.44
Sales 19.31 23.85 28.20 31.50 37.66
Less: Operating costs (60%) 11.59 14.31 16.92 18.90 22.60
Less: Indirect Costs
Administration costs 5.10 5.20 5.31 5.41 5.52
Cost for Feasibility Study 0.50 - - - -
Depreciation 1.00 1.00 1.00 1.00 1.00
Total cost 18.19 20.51 23.23 25.31 29.12
Profit/ (Loss) 1.13 3.34 4.98 6.19 8.54
Tax @40% 0.34 1.00 1.49 1.86 2.56
Profit/ (Loss) after tax 0.79 2.34 3.48 4.33 5.98
Depreciation 1.00 1.00 1.00 1.00 1.00
Cash Inflows 1.79 3.34 4.48 5.33 6.98
Net cash inflows 1.79 3.34 4.48 5.33 6.98

ANSWER TO QUESTION 2
The relevant cash flows to be considered for the project that are relative to the new
plant are presented as follows.
Initial outflows new
plant
Amount
in $
million
Initial outlay 63.00
Net working capital
Total 63.00
ANNUAL CASH
FLOWS Years
2016 2017 2018 2019 2020
Sales Quantity
(millions) 24 28.7 33.5 38.5 42.3
Sales Price 1.29 1.33 1.36 1.40 1.44
Sales 30.90 38.03 45.64 53.90 60.81
Less: Operating
costs (50%) 15.45 19.01 22.82 26.95 30.40
Less: Indirect Costs
Administration costs 5.10 5.20 5.31 5.41 5.52
Cost for Feasibility
Study 0.50 - - - -
Depreciation 1.88 1.88 1.88 1.88 1.88
Total cost 22.93 26.09 30.00 34.24 37.80
Profit/ (Loss) 7.98 11.94 15.64 19.66 23.01
Tax @40% 2.39 3.58 4.69 5.90 6.90
Profit/ (Loss) after
tax 5.58 8.36 10.95 13.76 16.11
Depreciation 1.88 1.88 1.88 1.88 1.88
Cash Inflows 7.46 10.23 12.82 15.64 17.98
Net cash inflows 7.46 10.23 12.82 15.64 17.98

ANSWER TO QUESTION 3
The proper discount rate calculation for the project is presented as follows.
Calculation of WACC (MKT
VALUE WEIGHTS) Capital Strcuture
Market value
of Equity 54000000
AMOU
NT Weights
Market value
of Bonds 115000000 Debt
10000
0000 62.50%
Equity
60000
000 37.50%
Total 169000000
16000
0000 100%
Cost of
Equity
Cost of
debt
Risk free rate
of return 3.50% Interest Expense
800000
0
Expected rate
of return 9%
Latest two year
average debt
107500
000
Beta 1.15
Cost of
debt 7.44%
Cost of
Equity 9.83%
Total Equity 3.14%
Total Debt 3.04%
WACC 6.18%