QUESTION 1 (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: Table 1. Sales and cash flow projections 2020 2021 2022 2023 125 2024 2025 Sales 120 135 140 120 110 EBITD 60 75 80 65 60 50 Depreciation ЕBIT (50) 10 (50) 25 (5) (50) 30 (50) 15 (50) 10 (50) Таx (2) (6) (3) (2) expense ΕΒΙΑΤ 20 24 12 Table 2. Cost of capital Risk-free Rate (Rf) Project Cost of Debt (Rd) Market Risk Premium 1% 4% 6% 20% 0.8 Marginal Corporate Tax Rate (Tc) Asset Beta of comparable companies Required: 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. (ii) Use the WACC method to estimate the NPV of the investment at the start of 2020 assuming that it is financed 40% with equity and 60% with debt and that the financing structure of the project does not change over the life of the project. Comment on your findings. (iii) Show how you could alternatively compute the NPV of part (ii) above by using the APV method rather than the WACC method. (iv) Calculate the NPV of the investment at the start of 2020 assuming that your firm initially borrows £120 million and then pays down the debt at a rate of £20 million per year. Assume that interest payments can always be used to offset the company's taxable profits over the life of the project. Comment on your findings.