Use the case data below to prepare and analyze your advice for Metu Ventures Ltd.

With the intention to establish a control influence in the production and marketing of table water purifying agent, Metu Ventures is considering investing in one of the following machines which is expected to utilize the latest technology in boosting the production of modified and physically enhanced table water. The economic analyses of the machines are as follows: PROJECTED CASH FLOWS Year M1('000) M2('000) 2012 (41,000) (39,000) 2013 14,200 11,000 2014 13,900 11,000 2015 12.600 11,000 2016 11,400 11,000 2017 10,700 11,000 All three machines have 5 years useful lifespan and any residual value is to be received as part of the 5th year cash flow. The companys cost of capital is tailored after the required rate of return (RRR) of a particular investor. This particular investor uses the following criteria to calculate his RRR: 1. The General Economic condition; 2. Level of inflation; 3. Marketability of Metus shares; 4. Metus business risk; 5. Metus financial risk; and 6. The volume of Metus capital base. Strong economic analysis indicates that the general economic condition of the country will be fairly stable and appreciative. The inflation level was12% five years ago and has been rising annually at 5%. The share of Metu is one of the most sought after at the Nigerian Stock Exchange in Lagos. The abridged financial statement of Metu for the past five years is as follows: Period Equity Debt Capital EBIT Interest Tax Capital 2007 20,000,000 10,000,000 98,005,080 1,300,000 24,175,000 2008 30,000,000 20,000,000 150,235,000 2,600,000 40,600,000 2009 30,000,000 20,000,000 164,500,500 2,600,000 45,740,000 2010 50,000,000 35,000,000 235,007,650 4,550,000 66,025,930 2011 50,000,000 40,000,000 250,650,500 5,200,000 72,407,750 The company has in issue a 15% debenture stock which has maintained a nominal value of N10,000,000 for the past five years. The ordinary share capital of the company carries a current market valuation of N2.45 with past dividend payments as follows: 56k; 67k; 89k; 95k; and 105k. Required Make out a report to the managing director showing: 1. The weighted average cost of capital of the company as at December 31, 2011 2. The cost of capital using CAPM if the risk free rate is 15%, the market risk rate is 32% while the beta is the same as Metus special investors RRR.

3. The NPV and IRR of the two machines using the cost of capital calculated in 1

and 2 above separately. Advise Metu on a choice criterion. Show your workings separately and make any assumptions you deem necessary.