Question

Flavor Explosion Cupcakes is purchasing a new industrial stand mixer. This mixer will increase their EBIT by 15,901 per year for the foreseeable future. It will cost $144,590, of which the firm will finance $84,231 using perpetual debt at 0.059. If Flavor Explosion's tax rate is 0.35 and their levered cost of equity is 0.1, what is the NPV of this stand mixer, using the FTE method?

Answer 1

Given EBIT = 15901

Less interest = 84231*0.059 = 4969.629

So EBT = 10931.371

less Tax @35% = 10931.371*35% = 2825.98

Netincome is 8105.39(FTE)

Given levered cost of equity is 0.1

present value of perpetual Flows = 8103.39/0.1 = 81033.9

NPV = pv of cash flows less equity investment

= 81033.9-(144590-84231) = 20674.9