(a) You are the financial manager of a very profitable firm, which is currently evaluating
a new, large investment project at the start of 2020. The project involves the acquisition
of a plant, which requires an initial outlay of £300 million. The project’s investment
horizon is six years. Over this period, the initial capital investment in the plant should
be fully depreciated. Despite this, it is expected that at the end of the project (after six
years) the taxable salvage value of the plant will amount to £50 million. The project
requires an initial (at the start of 2020) working capital investment of £30 million, which
should be recovered in full at the end of 2025. Your accountants have put together the
following projections on expected sales and cash flows, and information on the cost of
capital of the company:
Carry out the following calculations, always assuming that cash flows occur at the end
of their respective years:
(i) Estimate the NPV of the investment project at the start of 2020 if it is 100%
financed with equity. Comment on your findings. (20 marks)
Question 1 continued overleaf
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