Popa Energy Inc. is keen to
develop a power facility in the outskirts of Bagan, Myanmar. The finance
manager has estimated that the lease of land for 20 years will require a yearly
lease payment of Myanmar kyat (MMK) 180 million. The facility’s plant, property
and equipment (PPE) will cost MMK 5 billion. The tax authorities allow straight
line depreciation of all PPE for this project.
At the end of the project, all PPE are to be transferred to the Bagan
council for nil reward.
The revenue for the project is
expected to be MMK 1 billion per year with operating cost (excluding lease
payments) of MMK 200 million per annum. The building law requires the facility to
be refurbished after 10 years of operation, at a one-time cost of MMK 600 million.
Energy production is one of
the targeted industries for the country’s growth. Hence, the Burmese government
has granted a concessionary tax rate of 10 percent (minimum) for the duration
of this project. The actual rate will be made known after project commencement.
The following information relates to the company at the
current time:
Number of ordinary shares : 400
million
Market price of ordinary shares : MMK 225 per
share
Book value of 7% debentures (Par MMK100) : MMK 2,900 million
(Redemption: 5 years. Semi-annual coupon)
Market value of debenture : MMK
108.00 per debenture
Equity beta :
1.2
Risk-free rate of return : 0.7%
Return on the market portfolio : 7.0%
The company uses
the current weighted cost of capital as the project’s cost of capital.
Required:
(a)
Compute
the cost of equity, after-tax cost of debt (using a financial calculator) and
the after-tax weighted average cost of capital. Assume the tax rate of 10
percent.
(b) Compute the project’s Net Present Value
and explain if the project should proceed.
Assume the tax rate of 10 percent.
(c) How much would the additional taxes be (in today’s dollars) for the
project decision in part (a) above to be reversed?
Note: To show all workings with accompanying
explanations.
Word count requirement: 1,000 with a tolerance of +10%. (actual
wordcount to be stated on the cover page of the assignment). Minimum number of
references: NIL.