Project by using the adjusted present value method

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Reference no: EM132071998

Haver Bhd. is considering diversifying its operations by setting up a manufacturing division to produce plastic chairs. Its first potential project entails buying a moulding machine for RM5 million. This will produce annual revenue of RM1.5 million into perpetuity. The cost of production is expected to be 60% of the revenue. No inflation is considered in this case.

To invest in this machinery, Haver intends to finance 50% of the new machinery cost through the issue of non-traded irredeemable debentures. The annual interest rate is 10%. The remaining funds will come from retained earnings in the company.

The plastic industry has an average geared equity beta of 1.4 and the debt-to-total asset ratio is 1:5. The risk-free rate is 4% and the market risk premium is 8%. The annual corporate tax rate is 20%.

Analyse and advise Haver whether they should invest in this project by using the adjusted present value method. State clearly the assumptions you make.

Reference no: EM132071998

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