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The table below offers EBIT for a potential capital investment for Fake Company Zeta. (This same...

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Finance

The table below offers EBIT for a potential capital investmentfor Fake Company Zeta. (This same project will be used for all ofyour FMC #3 work.) You should be able to determine a few thingsonce you consider the following:

  • The initial investment is $20,000.
  • Depreciation is straight line over four years.
  • The company's WACC is estimated at 9.25%.
  • Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.
  • The company's tax rate is 30.0%.
YEAR 1YEAR 2YEAR 3YEAR 4
EBIT$(1,750)$325$1,025$3,700

What is this project's net present value?

Answer & Explanation Solved by verified expert
4.4 Ratings (750 Votes)

Time line 0 1 2 3 4
Cost of new machine -20000
=Initial Investment outlay -20000
=Pretax cash flows -1750 325 1025 3700
-taxes =(Pretax cash flows)*(1-tax) -1225 227.5 717.5 2590
+Depreciation =initial investment/4 5000 5000 5000 5000
=after tax operating cash flow 3775 5227.5 5717.5 7590
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 4200
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 4200
Total Cash flow for the period -20000 3775 5227.5 5717.5 11790
Discount factor= (1+discount rate)^corresponding period 1 1.0925 1.19355625 1.3039602 1.42457652
Discounted CF= Cashflow/discount factor -20000 3455.377574 4379.76844 4384.71971 8276.1437
NPV= Sum of discounted CF= 496

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Transcribed Image Text

The table below offers EBIT for a potential capital investmentfor Fake Company Zeta. (This same project will be used for all ofyour FMC #3 work.) You should be able to determine a few thingsonce you consider the following:The initial investment is $20,000.Depreciation is straight line over four years.The company's WACC is estimated at 9.25%.Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.The company's tax rate is 30.0%.YEAR 1YEAR 2YEAR 3YEAR 4EBIT$(1,750)$325$1,025$3,700What is this project's net present value?

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