Blossom Company management is considering a project that will require an initial investment of $48,500 and...

Blossom Company management is considering a project that will require an initial investment of $48,500 and will last for 10 years. No other capital expenditures or increases in working capital are anticipated during the life of the project. What is the annual EBIT that will make the project economically viable if the cost of capital for the project is 8 percent and the firm will depreciate the investment using straight-line depreciation and a salvage value of $0? Assume that the marginal tax rate is 40 percent. (Do not round intermediate calculations. Round final answer to 2 decimal places, e.g. 52.75.)

Expert Solution

To calculate the annual EBIT that will make the project economically viable if the cost of capital for the project is 8 percent; we have to assume Net Present Value (NPV) equal to zero. Let’s calculate EBIT by trial and error, where we can get NPV =0

Year (t)	Value of Asset	Depreciation (straight line)D : asset/10	EBIT (Taxable Income)	Income taxes = (Taxable Income *40%)	Net cash Flow = (Taxable income - Income tax + Depreciation)	PV of Net cash flow @8%= NCF/ (1+8%)^t
0	$48,500	N/A		0	-$48,500	-$48,500
1		$4,850.00	$3,963.22	$1,585	$7,228	$6,693
2		$4,850.00	$3,963.22	$1,585	$7,228	$6,197
3		$4,850.00	$3,963.22	$1,585	$7,228	$5,738
4		$4,850.00	$3,963.22	$1,585	$7,228	$5,313
5		$4,850.00	$3,963.22	$1,585	$7,228	$4,919
6		$4,850.00	$3,963.22	$1,585	$7,228	$4,555
7		$4,850.00	$3,963.22	$1,585	$7,228	$4,217
8		$4,850.00	$3,963.22	$1,585	$7,228	$3,905
9		$4,850.00	$3,963.22	$1,585	$7,228	$3,616
10		$4,850.00	$3,963.22	$1,585	$7,228	$3,348
NPV (sum of PVs)						$0.00

So EBIT should be atleast $3,963.22.

Formulas used in excel:

jeff jeffy answered 1 year ago

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