Question

The table below offers EBIT for a potential capital investment for Fake Company Alpha. (This same project will be used for all of your FMC #4 work.) You should be able to determine a few things once you consider the following:

• The initial investment is $2,400.
• Depreciation is straight line over four years.
• The company's WACC is estimated at 11.0%.
• Company analysts estimate that a proper salvage value at the end of the project life of four years is about 50% of the initial investment.
• The company's tax rate is 32.0%.

	YEAR 1	YEAR 2	YEAR 3	YEAR 4
EBIT	$(300)	$(190)	$45	$180

What is this project's net present value?

Answer 1

Year	0	1	2	3	4
Initial Investment	-2400
EBIT		-300	-190	45	180
less tax- 32%		-96	-60.8	14.4	57.6
EAT		-204	-129.2	30.6	122.4
add depreciation = (2400-1200)/4		300	300	300	300
after tax cash flow from scrap value					1200
net operating cash flow = EAT + depreciation+after tax sale proceeds	-2400	96	170.8	330.6	1622.4
present value of cash flow = net operating cash flow/(1+r)^n r =11%	-2400/1.11^0	96/1.11^1	170.8/1.11^2	330.6/1.11^3	1622.4/1.11^4
present value of cash flow = net operating cash flow/(1+r)^n r =11%	-2400	86.48649	138.6251	241.7319	1068.725
Net present value = sum of present value of cash flow	SUM(B91:F91)	-864.431