Laight1881 Laight1881

24-05-2023
Business

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KBS Plc. is considering entering the specialty retail business. The initial investment to get the retail stores launched is expected to be £5 billion, depreciable straight line over a lifetime of 10 years to a salvage value of zero. The tax rate for KBS Plc is 40% and the company faces an overall cost of capital of 11% for different businesses. The cost of capital for specialty retailers is 9%. Assume that KBS Plc. expects to stay in the retail business for only ten years. Revenues are expected to be £4 billion each year for the next ten years.
Requirements: (Please be explicit about the discount rate that you are using to compute the answers in each part)
a) If KBS Plc. expects the EBITDA margin (EBITDA as a percent of sales) at the stores will be 20%. Assuming no changes in working capital, please make the decision on this investment project using the NPV method?
b) Given the 20% EBITDA margin, what is the Profit Index for this investment project?
c) What is the IRR for this investment project (using trial-and- error), assuming the 20% EBITDA margin? d) If the EBITDA margin turns out to be 30%, What is the payback period and discounted payback period for the investment project?

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