Alpha Green Energy Ltd. (AGEL), a listed company engaged in manufacturing renewable energy equipment, is evaluating the establishment of a new…

Alpha Green Energy Ltd. (AGEL), a listed company engaged in manufacturing renewable energy equipment, is evaluating the establishment of a new manufacturing facility for high-efficiency solar modules. The project will be financed through a combination of equity, subsidized government debt, and market borrowings.The Board has decided that the project should be evaluated using the Adjusted Present Value (APV) approach because the financing package contains several financing side effects.The Finance Director has gathered the following information.Investment DetailsCost of land and building:₹ 120 croreCost of plant and machinery:₹ 240 croreInitial working capital requirement:₹ 30 crore The project has an economic life of 5 years. The working capital will be fully recovered at the end of Year 5. The land is expected to be sold at ₹150 crore at the end of Year 5. Plant and machinery are expected to have a salvage value of ₹ 24 crore at the end of Year 5. Depreciation under the Income-tax Act is allowable on Plant and Machinery using the Written Down Value (WDV) method @ 25% p.a.Ignore depreciation on land and building.Operating ForecastThe expected operating results (before depreciation and interest) are: Year 1 2 3 4 5 Revenue (₹ Cr.) 220 255 290 315 330 Operating Cost (excluding dep.) (₹ Cr.) 125 138 155 170 178 Additional Information Annual maintenance expenditure of ₹ 6 crore is included in operating costs. Inflation has already been incorporated in all cash flow estimates. Corporate tax rate is 30%. Taxes are paid in the same year. Financing PlanThe project will be financed as follows:(A) Government Soft LoanAmount:₹ 100 croreInterest rate:5% p.a.Market borrowing rate for similar type of loan:10% p.a.Principal repayable in one lump sum at the end of Year 5.(B) Term Loan from BankAmount:₹ 120 croreInterest rate:10% p.a.Principal is repayable equally over Years 2 to 5.Interest is payable annually on the outstanding balance.(C) EquityRemaining investment will be financed through equity.Financing Side EffectsIssue Cost SavingIf the company financed the project entirely with equity, flotation cost would have been 4% of equity raised. Because of debt financing, equity issue is reduced accordingly.Assume flotation cost saving occurs immediately.Government Capital SubsidyThe Government will provide a capital subsidy of ₹ 20 crore immediately after commencement of commercial production (end of Year 1).The subsidy is not taxable.Financial Distress CostManagement estimates that due to increased leverage, there is a 10% probability that the company may incur financial distress costs amounting to₹ 30 crore at the end of Year 5.Asset SaleThe sale proceeds of land and machinery at the end of Year 5 will be taxable based on applicable tax provisions.Cost of CapitalUnlevered Cost of Equity = 14%Market Value Debt Ratio of comparable unlevered firms = NilDiscount operating cash flows using 14%.Required:(i) Compute the Base Case NPV assuming the project is entirely equity financed.(ii) Compute the Present Value of Tax Shields arising from interest on: Government soft loan Commercial term loan (iii) Compute the Present Value of the Interest Subsidy arising from the concessional government loan.(iv) Compute the Present Value of Flotation Cost Savings.(v) Compute the Expected Present Value of Financial Distress Costs.(vi) Determine the Adjusted Present Value (APV) of the project.(vii) Comment whether the project should be accepted.Note: (1) Relevant Present Value (PV) factors shall be used up to four decimal places for all calculations.(2) All calculations shall be presented in crore and rounded off to two decimal places.