Question

The Deli Company is planning an investment in the consumer electronics market. The company already has an established brand recognition in this market, and believes it can capture 5% of the whole market. Table 1 sets out data on the relevant consumer electronics market.

Table 1: Consumer electronics market (numbers in millions)

Annual sales revenues	£100,000
Annual costs (variable)	£50,000
Annual growth in sales/costs	3%
Beta of sales and cost cash flows	1.5

Table 2: Deli's investment project

Investment cost in year 0	£5.9bn
Annual fixed costs	£1bn
Annual sales revenues	4.5% of total market
Annual variable cost	4% of total market
Working capital	20% of next year’s sales
Duration	10 years

The risk-free interest rate is 3% and the average return on the market index is 7%.

1. What is the relevant cost of capital for Deli’s investment appraisal analysis?

2. What is the present value of Deli’s future variable and fixed costs?

3. What is the net present value of Deli’s working capital investment?

4. What is the present value of Deli’s future sales revenues?

5. What is the net present value of Deli’s total investment in the consumer electronics market?

6. Why do you think that Deli’s sales revenues are 4.5% of the total market but only 4% of the total variable cost?

Answer 1

Based on the given data, pls find below the calculations:

Based on the above calcluations, pls find below the answers:

1. What is the relevant cost of capital for Deli’s investment appraisal analysis? Ans: Cost of Capital is 9% (assuming its through Equity, as debt details or tax% details have been provided; Considered based on the Market Return, beta factor and Risk free return)

2. What is the present value of Deli’s future variable and fixed costs?: Present Value of Variable Costs: $ 14411 Mn, Present Value of Fixed Costs: $ 6418 Mn

3. What is the net present value of Deli’s working capital investment? Present Value of Working Capital : $ 1080 Mn

4. What is the present value of Deli’s future sales revenues? Present Value of Sales Revenues: $ 32424 Mn

5. What is the net present value of Deli’s total investment in the consumer electronics market?: Present Value of total Invesment: INvestment Plus Working Capital : $ 5900 + $ 1080 = $ 6980 Mn

6. Why do you think that Deli’s sales revenues are 4.5% of the total market but only 4% of the total variable cost? Based on the Beta factor of Sales and Costs as compared to the Electronics Market.