Question

# Sisters Ltd is planning to invest in a capital project, which will generate cash inflows of...

Sisters Ltd is planning to invest in a capital project, which will generate cash inflows of \$15,000 in the 1st year, \$22,000 in the 2nd year, and \$25,000 in the 3rd year. The project ends after year 3. The company’s current debt to equity ratio is 0.8 with the cost of debt of 8% p.a. compounded annually. Sisters Ltd stock has a beta of 1.2. The risk-free rate is 3% p.a. compounded annually and the expected market return is 12% p.a. compounded annually. The cost of equity of 10.5% p.a. compounded annually. The new debt to equity ratio is 1. What is the total present value of the project’s cash inflows? Show your work.

 Note: New debt equity ratio has been considered in the calculation of WACC Source of funds Cost Weight Cost * Weight Debt 8.00% 0.5 4.00% Equity 10.50% 0.5 5.25% Weighted average cost of capital (WACC) 9.25% Since the debt equity ratio is 1, the new weight of debt = new weight of equity = 1/2 = 0.50 Discount factor = 1/(1+Discount rate)^No. of years Year Cash inflow Discount factor Discounted cash inflow A B A*B 1 15000 0.9153 13,729.98 2 22000 0.8378 18,432.31 3 25000 0.7669 19,172.36 Present value of cash inflows 51,334.65

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