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Calculate the true cost of the new project

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Reference no: EM132813130

Question - Due to the ongoing COVID 19 pandemic, Asepsis Ltd had decided to expand its sanitation product line to include the production of disposable face masks. The equipment will cost Asepsis $1,575,000 and it will cost $425,000 to install. Asepsis believes there will be a steady demand for masks in the coming years and so it expects this project will generate after-tax cash flows of $654,500 per year for the 5-year life of the project, with the first cash flow starting at the end of the first year.

Asepsis will raise the funds for the new project by a mix of new debt and new equity that will maintain its target debt to equity ratio of 0.25. Asepsis wishes to raise the funds by:

A new issue of ordinary shares. The flotation costs of the new share issue would be 10% of the amount raised. The beta for Asepsis is 1.75, the risk-free rate is 2.5% and the market risk premium is 7%.

A new issue of 5-year bonds with a yield to maturity of 6.25% pa. The flotation costs of the new debt would be 2.5% of the amount raised.The company tax rate is 30%.

Required -

1. Calculate Asepsis Ltd's average percentage flotation cost of the new fund raising.

2. Calculate the true cost of the new project.

3. Calculate the company's WACC.

4. Calculate the net present value (NPV) of the new project.

5. Explain if Asepsis Ltd should accept the new project or not.

Reference no: EM132813130

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