a. Estiamte the free cashflow to all investors of this project. b. Find the project’s NPV c. By using 14% as the second cost of capital, estimate the Internal Rate of Return of the project.
Adepa Shoes Limited, a Ghana-based shoe manufacturing company, has developed a new concept
shoe known as “heaven-road”. The new shoe is targeted at young corporate executives. It would
cost Ghc 6 million to purchase and install the equipment necessary to manufacture the new shoe,
and Ghc 1.5 million of net operating working capital would be required at the beginning of the
project. Investment in Networking capital for subsequent years will be 30% of sales for the
respective years. All investment in working capital are recovered at the end of the project. The
shoes will sell for Ghc 800 per unit, and management believes that variable costs would amount
to Ghc 400 per unit. The company’s fixed costs would be Ghc 1 million per year. The server project
would have a life of 4 years. Conditions are expected to remain stable during each year of the
operating life; that is, sales price and unit costs would be unchanged. If the project is undertaken,
it must be continued for the entire 4 years. Also, the project’s returns are expected to be highly
correlated with returns on the firm’s other assets. The firm believes it could sell 5000, 7000, 9000,
and 11000 units of servers in years 1, 2, 3, and 4 respectively.
The equipment will have a Net Book Value of Ghc 2000,000 at the end of the 4 years, however, it
can be sold for Ghc 3,500,000 in the market. Webmasters’ tax rate is 35 percent. Profits on the
disposal of non-current assets attracts a 10% tax rate. The cost of capital is 12 percent for averagerisk projects of this nature.
Required:
a. Estiamte the free cashflow to all investors of this project.
b. Find the project’s
c. By using 14% as the second cost of capital, estimate the
project.
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