Reference no: EM132969790

Question - Roberts Limited is a medium size electronic company. It is considering investment in new plant to enable a brand-new Component to be manufactured. The cash flows that have been estimated are as follows:

Year 0 Initial Investment (£500,000)

Year 1 Net after tax cash flow £200,000

 Year 2 Net after tax cash flow £220,000

Year 3 Net after tax cash flow £100,000

 Year 4 Net after tax cash flow £80,000

Year 5 Net after tax cash flow £105,000

It is expected that the new plant will have zero value at the end of the five-year project life The capital structure of Roberts Limited is as follows: Ordinary Share Capital of 1,000,000(Par Value £1) 10% irredeemable Debentures of £100,000 The ordinary shares are currently trading at 50 pence per share. The debentures are currently trading at a price of £80.00 per £100 block. The company has just paid an ordinary share dividend of 10 pence per share and future dividends are expected to remain the same. The company pays corporation tax at a rate of 25%.

Required -

a) Calculate the Weighted Average Cost of Capital for Roberts Limited.

b) Using the Weighted Average Cost as the investment hurdle rate calculate the net present value for the proposed project.

c) Advise the management of Roberts Limited as to whether to proceed with the project, highlighting any assumption's that you have made.