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

Free

60.1K

Verified Solution

Question

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 1 YEAR 2 YEAR 3 YEAR 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

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

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?

	YEAR 1	YEAR 2	YEAR 3	YEAR 4
EBIT	$(1,750)	$325	$1,025	$3,700