Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk-free rate of interest is 10% and the market risk premium is 10%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows:
Year
Cash Flows (GH¢)
1
25,000
2
39,000
3
42,000
4
35,000
5
25,000
6
30,000
Advise whether the company should buy the equipment or not using the NPV and profitability index.
Why would you prefer the NPV method to other methods of project evaluation?