Smoke Fire Protection (SFP) specialises in designing and manufacturing fire detectors and alarms in the UK.

Recently
quality and price of their product. The costs to complete the final stages of regulatory approval are estimated to be
detectors is expected to have a production life of six years. The finance director has asked you to prepare an investm
recommendation to the directors whether to proceed with the new production.
The new generation of smoke detectors will require a new factory unit, which will be built on a vacant site near Milt
(ignore any tax implications of selling the site). SFP would need to invest £32m to build the new factory and acquire
over the useful life of assets. The plant and equipment is not expected to have any scrap value at the end of the pro
project. It is expected that 70% of the working capital investment will be recovered at the end of the project.

Currently, net investment in plant and equipment is eligible for capital allowances on a straight-line basis over four y
SFP in the same year that they are claimed but taxes on profits are paid one year in arrears. You may ignore any taxe

SFP expects to sell a total of 800,000 of the smoke detectors each year at a fixed price of £60 per kit over the planne
£30m per annum. All cash flows are in today’s money and inflation is expected to be 2% per annum over the next si
SFP’s shares continue to be listed on the London Stock Exchange where they currently trade at £5 with an equity be
currently has a market debt-to-equity ratio (D/D+E) of 30%. SFP has sufficient resources available to fund the projec
company is 6%.
Corporate tax rate 0.3
risk-free rate 0.015 Note: In a WhatsApp group people h
inflation 0.02 NPV 14.26, 17.03, 17.33
equity beta 1.3 Payback 3 years 2 months, 3 years 5
cost of borrowing 0.06 IRR 19.42, 19.28, 19.42
share value 5
Equity risk premium 0.08
Years
0 1 2
Investment -32,000,000
Revenue £48,960,000.00 £49,939,200.00

Working capital -12,000,000
Exsisting site -10,000,000
Regulatory approval -£4,000,000.00
Operating costs -£30.60 -£31.21

Cashflows -£58,000,000.00 £48,959,969.40 £49,939,168.79

Tax relief £22,400,000.00
Taxation £14,687,990.82

Net cash flow -£35,600,000.00 £48,959,969.40 £35,251,177.97

Discount factor 1.000 0.912 0.833
Present Value -£35,600,000.00 £44,675,581.17 £29,351,600.00
Net Present Value £124,801,282.17

IRR 1.19

Payback
Cash outstanding
Calculate payback point
Number of months to payback
Years and months to payback
 n a WhatsApp group people have shared the numbers they have got. This is what has been shared so far
4.26, 17.03, 17.33
ck 3 years 2 months, 3 years 5 months
42, 19.28, 19.42

Years
3 4 5 6 7

£50,937,984.00 £51,956,743.68 £52,995,878.55 £54,055,796.12

-£8,400,000.00

-£31.84 -£32.47 -£33.12 -£33.78

£50,937,952.16 £51,956,711.21 £52,995,845.43 £45,655,762.34 £0.00

£14,981,750.64 £15,281,385.65 £15,587,013.36 £15,898,753.63 £13,696,728.70

£35,956,201.53 £36,675,325.56 £37,408,832.07 £29,757,008.71 -£13,696,728.70

0.760 0.693 0.633 0.577 0.527
£27,318,762.66 £25,426,715.86 £23,665,708.71 £17,177,648.45 -£7,214,734.69
en shared so far