Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany...

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Finance

Epiphany Industries is considering a new capital budgetingproject that will last for three years. Epiphany plans on using acost of capital of 12% to evaluate this project. Based on extensiveresearch, it has prepared the following incremental cash flowprojections:
Year
0
1
2
3
Sales (Revenues)
100,000
100,000
100,000
- Cost of Goods Sold (50% of Sales)
50,000
50,000
50,000
- Depreciation
30,000
30,000
30,000
= EBIT
20,000
20,000
20,000
- Taxes (35%)
7000
7000
7000
= unlevered net income
13,000
13,000
13,000
+ Depreciation
30,000
30,000
30,000
+ changes to working capital
-5000
-5000
10,000
- capital expenditures
-90,000
Q1 : Are they using MACRS? Explain.
Q2 : What’s EBITDA here?

Answer & Explanation Solved by verified expert

4.2 Ratings (733 Votes)

Answer 1MACRS is used for the computation of deduction of tax in respectof depreciation for those assets on which depreciation is chargedIn terms of degree of deduction it is found that greater deductionis done in the earlier years while smaller in the latterperiodMACRS Cost 1Useful life A Depreciation conventionIn the 2nd year the formula isMACRS Cost previous year See Answer

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Epiphany Industries is considering a new capital budgetingproject that will last for three years. Epiphany plans on using acost of capital of 12% to evaluate this project. Based on extensiveresearch, it has prepared the following incremental cash flowprojections:Year0123Sales (Revenues)100,000100,000100,000- Cost of Goods Sold (50% of Sales)50,00050,00050,000- Depreciation30,00030,00030,000= EBIT20,00020,00020,000- Taxes (35%)700070007000= unlevered net income13,00013,00013,000+ Depreciation30,00030,00030,000+ changes to working capital-5000-500010,000- capital expenditures-90,000Q1 : Are they using MACRS? Explain.Q2 : What’s EBITDA here?

Year	0	1	2	3
Sales (Revenues)		100,000	100,000	100,000
- Cost of Goods Sold (50% of Sales)		50,000	50,000	50,000
- Depreciation		30,000	30,000	30,000
= EBIT		20,000	20,000	20,000
- Taxes (35%)		7000	7000	7000
= unlevered net income		13,000	13,000	13,000
+ Depreciation		30,000	30,000	30,000
+ changes to working capital		-5000	-5000	10,000
- capital expenditures	-90,000