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 (b) a
bove to be reversed?