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Forton plc is considering opening a restaurant in Lancaster. The project requires an initial investment of £400,000 in building activities. For this project, Forton is planning to use a piece of land

Forton plc is considering opening a restaurant in Lancaster. The project requires an initial investment of £400,000 in building activities. For this project, Forton is planning to use a piece of land purchased 5 years ago at £350,000. The current value of the land (s £300,000 and £20,000 is required to be invested for landscaping activities before building commences Cash flows from sales and cash costs all occur at a frequency of 12 months indefinitely. The first sales and cost cash flows occur one year after the implementation of the project and the variable cost of the project amounts 19 40% of sales. The firm is subject to 20% tax rate and the firm's all-equity cost of capital is 10% per annum The firm's cost of debt is 6% per annum and, for simplicity, it can be assumed that the corporate debt of this firm is risk-free. The initial cash outflow of the project does not trigger any depreciation. Assume that this is the only project of the firm. If the project is financed with 100% equity its net present value is £48,000 (negative)
(ii) Assume that, as in (ii), 50% of the initial cash outflow is financed with debt. Use the flow- toequity approach to calculate the net present value of the project. Should the firm implement the project? iv) Assume that, as in (ii) and (iii), 50% of the initial cash outflow is financed with debt. Use the weighted-average-cost-of-capital approach to calculate the net present value of the project. Should the firm implement the project?

Apr 14 2021 View more View Less

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