Reference no: EM132967269

Minks (Ltd) is a listed company that has been successful in the past decade. In 2021, the company's board has decided to expand its operations by embarking on a new project to gain more market share. Minks (Ltd) would need to invest R30-million, payable at the beginning of the first year of the project. The project is expected to have a four-year life span.

The forecast financial are as follows:

Year                                                    1                           2                     3                 4

Units sold per year                   320000                  350000       475000       500000

Price per unit sold (R/unit)          140                     145              150              150

Variable cost per unit (R/Unit)           70                    70               70                70

Fixed costs per annum (R)            2500000         2500000        2700000    2700000

Additional project information:

• Price and costing information are in current terms before the application of selling price inflation of 7% per annum, variable cost inflation of 4% and fixed cost inflation of 5%;
• Current corporate tax is at 28% and the tax liability is payable in the year it arises. Assume profit from the project is similar to its cash flow;
• Minks (Ltd) has a cost of debt of 10%;
• The risk-free rate is 7%, the return on the market where Minks (Ltd) is listed is 15% and it has a beta coefficient of 1.1;
• It is the company's policy to maintain a 40/60 debt/equity financing; and
• Minks (Ltd) uses its weighted cost of capital in all project appraisals.

Required:

Problem 1: Recommend whether Minks (Ltd) should embark on this expansion project or not. Show all your calculations to justify your recommendation.