Question 3

Question 3:
1. Calculate the Weighted Average Cost of Capital (WACC) for the project. Hint: Use
dividend capitalization model (constant growth model) to calculate cost of equity.
D1=120, P0 =1,500 birr, g = 6.7%
Therefore, cost of equity =120/1500 + 6.7%
= 0.08+0.067 = 14.7%
Cost of debt=15%*(1-tax) = 15%*(1-30%) = 10.5%
WACC = Wequity*Requity + Wdebt*Rdebt
= 40%*14.7% + 60%*10.5% = 0.1218=12.18%
2. Determine the investment cost of the project.
Investment Cost = Hives & Prep.cost + Production Equipment + Office equipment
& furniture + Preparatory study cost
= 2,800,000 + 640,000 +420,000 + 50,000= 3,910,000 Br
3. Prepare the projected income statement for each of the five years.
Year 1 Year 2 Year 3 Year 4 Year 5

36,000,000 43,200,000 51,840,000 62,208,000
Income_Honey
36,000,000
2,880,000 3,168,000 3,484,800 3,833,280 4,216,608
Income_byproduct
-3,000,000 -3,000,000 -3,000,000 -3,000,000 -3,000,000
Rent
-2,880,000 -3,600,000 -3,600,000 -3,600,000 -3,600,000
Salary Expense
-30,660,000 -30,660,000 -30,660,000 -35,040,000 -35,040,000
COGS
-90,000 -90,000 -90,000 -90,000 -90,000
Cleaning supplies
Selling & other admin.
-100,000 -100,000 -100,000 -100,000 -100,000
Expenses
-36,730,000 -37,450,000 -37,450,000 -41,830,000 -41,830,000
Gross expenses
Earnings before
2,150,000 1,718,000 9,234,800 13,843,280 24,594,608
Income Tax(EBIT)
731,000 771,000 771,000 771,000 771,000
Depreciation
1,419,000 947,000 8,463,800 13,072,280 23,823,608
Profit Before Tax
425,700 284,100 2,539,140 3,921,684 7,147,082
Tax
Profit After Tax 993,300 662,900 5,924,660 9,150,596 16,676,526
4. Determine the relevant cash inflows of the project for each of the five years
Cash Inflows
38,880,00 55,673,28
Revenue 0 39,168,000 46,684,800 0 66,424,608
Salvage Value 255,000
Working Cash flow
release 360,000
38,880,00 55,673,28
Net Cash Inflows 0 0 39,168,000 46,684,800 0 67,039,608
5. Determine the relevant cash outflows of the project for each of the five years
Cash Outflows
Investment
-3,910,000
Expenses Less
Rent -33,730,000 -34,450,000 -34,450,000 -38,830,000 -38,830,000
Rent -3,000,000 -3,000,000 -3,000,000 -3,000,000 -3,000,000

Change in WC -2,655,000 0 0 -360,000 0
Tax -425700 -284100 -2539140 -3921684 -7147082.4
Net Cash
Outflows -3,910,000 -39,810,700 -37,734,100 -39,989,140 -46,111,684 -48,977,082
6. Determine the net cash flows of the project for each of the five years.

1,433,90
Net Cash flows -3,910,000 -930,700 0 6,695,660 9,561,596 18,062,526
7. Evaluate the feasibility of the project.
The project is feasible because it passes all the criteria as described below:
a. Payback period where the acceptable time limit is 2 years.
yea Cumulative
r Cash flow cash flows
0 -3,910,000 -3,910,000
1 -930,700 -4,840,700
2 1,433,900 -3,406,800
3 6,695,660 3,288,860
Payback period=1+(3,406,800/6,695,660) = 1.508 years, hence the project is acceptable.
b. [email protected]% = 17,347,575>0, > 0, therefore the project is feasible.

Discounted factor Discounted cash
Year Net cash flow for 12.18% rate flow
0 -3,910,000 1 -3,910,000
1 -930,700 0.891424496 -829,648.78

1,139,430.9
2 1,433,900 0.794637633
4,742,934
3 6,695,660 0.708359451
6,037,659.9
4 9,561,596 0.631448967
10,167,199
5 18,062,526 0.562889078
17,347,575
NPV =
c. IRR
Discounted
factor for Discounted Discounted Discounted
r=62.18%
r=12.18% cash flow r=60.18% cash flow cash flow
Year Net cash flow rate rate
0 -3,910,000 1 -3,910,000 1 -3910000 1 -3910000
0.89142449 0.62429766 -517947.8 0.61659884 -511560
1 -930,700 6 -829,648.78 5 1
0.79463763 1,139,430.9 0.38974757 444090.43 433204.9
2 1,433,900 3 5 0.38019413
0.70835945 4,742,934 0.24331850 1154043.6 1111873
3 6,695,660 1 1 0.23442726
0.63144896 6,037,659.9 0.15190317 917139.69 0.14454757 872729.1
4 9,561,596 7 2 7
0.56288907 10,167,199 0.09483279 964183.91 0.08912786 906180.8
5 18,062,526 8 6 8
17,347,575 -948,490.18 -1,097,573
NPV =
IRR= L+ [NL/ (NL -NH) x (H-L)].
IRR= 60.18 + [948,490.18/ (948,490.18-(-1,097,573)) *(62.18-60.18)]

= 60.18 + (948,490.18/2,046,063.18*2
= 60.18+(0.4635684141*2)
= 60.18+0.9271368282
IRR= 61.107%, hence the project is feasible.

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Question 3:

D1=120, P0 =1,500 birr, g = 6.7%

Therefore, cost of equity =120/1500 + 6.7%

Cost of debt=15%*(1-tax) = 15%*(1-30%) = 10.5%

WACC = Wequity*Requity + Wdebt*Rdebt

= 40%*14.7% + 60%*10.5% = 0.1218=12.18%

2. Determine the investment cost of the project.

Investment Cost = Hives & Prep.cost + Production Equipment + Office equipment

& furniture + Preparatory study cost

= 2,800,000 + 640,000 +420,000 + 50,000= 3,910,000 Br

Year 1 Year 2 Year 3 Year 4 Year 5

Profit After Tax 993,300 662,900 5,924,660 9,150,596 16,676,526

Rent -3,000,000 -3,000,000 -3,000,000 -3,000,000 -3,000,000

Tax -425700 -284100 -2539140 -3921684 -7147082.4

Year 1 Year 2 Year 3 Year 4 Year 5

7. Evaluate the feasibility of the project.

a. Payback period where the acceptable time limit is 2 years.

Payback period=1+(3,406,800/6,695,660) = 1.508 years, hence the project is acceptable.

b. [email protected]% = 17,347,575>0, > 0, therefore the project is feasible.

1 -930,700 0.891424496 -829,648.78

IRR= 60.18 + [948,490.18/ (948,490.18-(-1,097,573)) *(62.18-60.18)]

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Cost of debt=15%(1-tax) = 15%(1-30%) = 10.5%

WACC = WequityRequity + WdebtRdebt

= 40%14.7% + 60%10.5% = 0.1218=12.18%