Case Study: Rayan Food Industries' New Production Line
Rayan Food Industries is considering opening a new production line. Before it can evaluate the decision with NPV, it first needs to calculate its cost of capital (WACC) to use as the discount rate.
Current capital structure
| Item | Value |
|---|---|
| Total Debt | EGP 1,200,000 |
| Interest rate on debt (pre-tax) | 9% |
| Total Equity | EGP 1,800,000 |
| Tax rate | 22.5% |
| Risk-free rate (Rf) | 4% |
| Equity risk premium | 6.5% |
| Beta (β) | 1.2 |
The new production line
| Item | Value |
|---|---|
| Initial investment | EGP 500,000 |
| Expected annual cash flow (5 years) | EGP 140,000 |
What’s required
- Download the blank Excel template and calculate:
- Cost of equity using CAPM.
- After-tax cost of debt.
- Debt weight and equity weight of total capital.
- The full WACC.
- Use the WACC as your discount rate and calculate the NPV of the new production line over 5 years.
- Make the call: would you recommend the company open this production line or not? Explain why.
- Compare your work to the downloadable “solved model” file.
- Test your understanding on the quiz page.
Tip: revisit the interactive WACC lab in lesson three if you need to double-check a formula before applying it in Excel.