Question

The table below offers EBIT for a potential capital investment for Fake Company Zeta. (This same project will be used for all of your FMC #3 work.) You should be able to determine a few things once you consider the following:

• The initial investment is $4,000.
• Depreciation is straight line over four years.
• The company's WACC is estimated at 15.0%.
• Company analysts estimate that a proper salvage value at the end of the project life of four years is about 30% of the initial investment.
• The company's tax rate is 30.0%.

	YEAR 1	YEAR 2	YEAR 3	YEAR 4
EBIT	$500	$650	$700	$1,100

What is this project's net present value?

Answer 1

Statement showing NPV

	Year
Particular	0	1	2	3	4	NPV
Initial Investment	-4000
EBIT		500	650	700	1100
Depreciation(4000/4)		1000	1000	1000	1000
PBT		-500	-350	-300	100
Tax savings @ 30%		150	105	90	-30
PAT		-350	-245	-210	70
Add: Depreciation		1000	1000	1000	1000
Annual Cash flow		650	755	790	1070
Salvage value = 30% x 4000 = 1200 After tax salvage value =1200(1-tax rate) =1200(1-0.3) =1200(0.7) =840					840
Total Cash flow	-4000	650	755	790	1910
PVIF @ 15%	1.0000	0.8696	0.7561	0.6575	0.5718
Present value= Cash flow*PVIF	-4000.00	565.22	570.89	519.44	1092.05	-1252.41