ASSIGNMENT -
The management team of Expedia Ltd, a German based company,are in the preliminary stages of developing a new manufacturing product. The estimated cash inflows and outflows, and details of the taxation outflows are shown below.
|
End of Year
|
Inflows €'000
|
Outflows €'000
|
Taxation €'000
|
|
0
|
|
(20,000)
|
|
|
1
|
|
(20,000)
|
|
|
2
|
|
(30,000)
|
|
|
3
|
|
(20,000)
|
|
|
4
|
|
(10,000)
|
|
|
5
|
|
(5,000)
|
|
|
6
|
10,000
|
|
|
|
7
|
20,000
|
|
(4,000)
|
|
8
|
30,000
|
|
(5,000)
|
|
9
|
40,000
|
|
(3,000)
|
|
10
|
50,000
|
|
(3,000)
|
|
11
|
40,000
|
|
(6,000)
|
|
12
|
50,000
|
|
(7,000)
|
|
13
|
40,000
|
|
(8,000)
|
|
14
|
40,000
|
|
(10,000)
|
|
15
|
50,000
|
|
(15,000)
|
|
16
|
|
|
(15,000)
|
In order to support this project Expedia Ltd are planning to raise €150m of financing in total. Of this €100m would be from equity and €50m from debt sources. The equity shareholders require a return of 12% and the after-tax cost of the debt is likely to be 9%. The management use a Net Present Value (NPV) technique to assist with capital decisions of this nature. The discount rate for the financial model uses the Weighted Average Cost of Capital (WACC) for the business, but this is increased by a risk premium of 3% to reflect the long term and uncertain nature of this project.
Requirements -
a) Prepare a report, supported by full calculations, which indicates whether or not the project would be viable for the company.
b) What is the Internal Rate of Return of this project? Show all your calculations.
c) Explain the financial risks to which the company might become exposed if a refinancing option (overseas loan) were to be taken. Recommend ways in which the company could attempt to deal with any such risks.