a.) Frank is looking for a new sausage system with an installed cost of K390,  000. This cost will be depreciation straight line to Zero over the project's life 5-year life,  at the end of which the sausage system can be scraped for K60, 000. The system will save the firm K120, 000 per year in the pre-tax operating costs,  and the system requires an initial investment in net working capital of K28, 000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of this project?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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a.) Frank is looking for a new sausage system with an installed cost of K390,  000. This cost will be depreciation straight line to Zero over the project's life 5-year life,  at the end of which the sausage system can be scraped for K60, 000. The system will save the firm K120, 000 per year in the pre-tax operating costs,  and the system requires an initial investment in net working capital of K28, 000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of this project? 

b.)  "the difficulty with capital budgeting is not in deciding whether NPV,  IRR or any other evaluation technique but in identifying suitable projects and estimating there cash flows."

i.) Evaluate this statement.  As part of your answer consider:

ii.)  why NPV AND IRR may be preferred to other techniques such as payback and accounting rate of return

iii.)  why NPV is generally preferred to IRR,  and how NPV may be interprated. 

c.)  Consider that Leeds plc is financed by a combination of debt and equity.  The book value of equity is K3.5 million and it has 1.5million shares outstanding. Leeds plc shares current dividend is at K2.6 which grows at 6% forever.  The rate of return demanded by its shareholders on equity is 12%. The value of leeds plc's outstanding debt is K2 million and the cost of debt is 8%. There is corporate tax of 40%. You are required to estimate the WACC, of leeds plc. 

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