Question

Charlie Corp (CC) has a 3-year project that costs $1,200 today and produces EBITDA of $800/year for each of the next three years (years 1-3). The asset will be fully depreciated using straight-line depreciation over the three-year life. CC estimates that projects of this riskiness have a required rate of return of 20% and CC has a marginal tax rate of 30%. Assuming that CC is financed with 100% equity then what are the IRR and NPV of the project? Alternatively, CC can issue $500 of debt today with an 8% interest rate (interest paid each year and the principal paid in year 3). How much would the NPV of the project change as a result of using $500 in debt to finance the project? (i.e. what is the present value of the interest tax shield?)

Answer 1

Formuals Used:-

Initial Inevestment	1200
Time	3
Rate	0.2
Depriciation	=C1/C2
EBITDA	800
Depriciation	=C4
Profit before tax	=C6-C7
Tax(30%)	=C8*30%
Profit after Tax	=C8-C9
Net Cashflow	=C10+C7
NPV	=PV(C3,C2,-C11)-C1
IRR	=RATE(C2,-C11,C1)
Debt	500
Interest on debt	=C16*8%
Tax shield by debt	=C17*30%
Present Value of tax shield	=PV(C3,C2,-C18)
NPV with Debt	=C19+C13

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