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

Free

80.2K

Verified Solution

Question

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 1 YEAR 2 YEAR 3 YEAR 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

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 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?

	YEAR 1	YEAR 2	YEAR 3	YEAR 4
EBIT	$(3,600)	$(2,725)	$1,875	$5,000