laptop plc is planning on setting up a laptop

Question

Laptop plc. is planning on setting up a laptop repair centre. They estimate that:

The required investment will be £0.3m and the investment's life is expected to be 5 years.

The investment is to be depreciated using the straight line depreciation method and none of the costs are expected to be recovered at the end of the 5 years.

Total revenues from repairs are expected to be £200,000 in year one (one year from now), growing at 2.5% per annum. Staffing costs are £90,000 per year.

Administrative, advertising and general expenses associated with the centre are expected to be £20,000 per year. 

All costs are expected to increase at 2.5% per annum. 

The discount rate for ventures of similar risk is 12%.

Laptop plc. faces a corporate tax rate of 35%.

1. Calculate the NPV of this project and determine whether it should be accepted or rejected.

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Investment	-300000
Revenues		200000	205000	210125	215378.1	220762.6
Total Costs		110000	112750	115568.8	118458	121419.4
Depreciation		60000	60000	60000	60000	60000
Total Income		30000	32250	34556.25	36920.16	39343.16
Taxes		10500	11287.5	12094.69	12922.05	13770.11
AT Income		19500	20962.5	22461.56	23998.1	25573.05
CF (add depr)		79500	80962.5	82461.56	83998.1	85573.05
PV	-300000	70982.14	64542.81	58694.51	53382.31	48556.45
R=0.12
NPV	-3841.78

1. Suppose you are told that Laptop plc. is totally equity financed. The company has a beta equal to 1.2. Appropriate estimates for the risk free rate and the market risk premium are 2% and 4%, respectively. Calculate the NPV of this project and determine whether it should be accepted or rejected.

RCAPM	0.068
	-300000	74438.2	70980.88	67692.07	64563.11	61585.83
NPV	39260.1

1. Suppose you are told that Laptop plc's core business is not laptop repairs but production of laptop components. The beta of companies in the laptop repair business is generally around 2.5. Would you recommend accepting or rejecting the project? [Explain your answer in no more than 100 words]  
2. In no more than 200 words, illustrate the concept of homemade leverage and explain the role it plays in Modigliani's and Miller's capital structure irrelevance result.