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The table below offers EBIT for a potential capital investment for Fake Company Alpha. You should...

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Finance

The table below offers EBIT for a potential capital investmentfor Fake Company Alpha. You should be able to determine a fewthings once you consider the following:

  • The initial investment is $12,000.
  • Depreciation is straight line over four years.
  • The company's WACC is estimated at 8.5%.
  • Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.
  • The company's tax rate is 27.0%.
YEAR 1YEAR 2YEAR 3YEAR 4
EBIT$(3,600)$(2,725)$1,875$5,000

What is this project's net present value?

Answer & Explanation Solved by verified expert
4.3 Ratings (696 Votes)

Time line 0 1 2 3 4
Cost of new machine -12000
=Initial Investment outlay -12000
EBIT -3600 -2725 1875 5000
-taxes =(Pretax cash flows)*(1-tax) -2628 -1989.25 1368.75 3650
+Depreciation 3000 3000 3000 3000
=after tax operating cash flow 372 1010.75 4368.75 6650
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 2628
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 2628
Total Cash flow for the period -12000 372 1010.75 4368.75 9278
Discount factor= (1+discount rate)^corresponding period 1 1.085 1.177225 1.2772891 1.3858587
Discounted CF= Cashflow/discount factor -12000 342.8571 858.5869 3420.3298 6694.7662
NPV= Sum of discounted CF= -683.46

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Transcribed Image Text

The table below offers EBIT for a potential capital investmentfor Fake Company Alpha. You should be able to determine a fewthings once you consider the following:The initial investment is $12,000.Depreciation is straight line over four years.The company's WACC is estimated at 8.5%.Company analysts estimate that a proper salvage value at theend of the project life of four years is 30% of the initialinvestment.The company's tax rate is 27.0%.YEAR 1YEAR 2YEAR 3YEAR 4EBIT$(3,600)$(2,725)$1,875$5,000What is this project's net present value?

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