Question

1)      Given the following project data sheet:

    

	Year 1	Year 2	Year 3	Year 4
Investment at time 0	$ 2000	0	0	0
Revenue	1700	1450	1250	1000
Expense	1000	920	840	760

   Determine after federal income tax the present value if the interest rate of 15 % and inflation    rate 10 %, use mid year continues method .

Answer 1

Discount rate = (Interest rate - inflation rate) / (1 + inflation rate) = (0.15-0.1)/(1+0.1) = 0.04545 = 4.54%

For Mid year Discounting, half year is taken as 1 year.

Enterprise Value (EV) = FCF1 / (1+r)^(0.5) + FCF2 / (1+r)^1.5 + ..... + FCFn / (1+r)^(n-0.5)

r = discount rate

FCF = Free cash flow

n = number of years

Assumption - Tax rate = 35%

Discount rate						0.045455
Year	0	1	2	3	4	Total
Investment at time 0	-2000		0	0	0
Revenue		1700	1450	1250	1000
Expense		-1000	-920	-840	-760
Net Profit	-2000	700	530	410	240
Tax		-245	-185.5	-143.5	-84
Total	-2000	455	344.5	266.5	156
PV	-2000	445.00	322.28	238.47	133.52	(860.73)

Present Value (PV) after federal income tax = -860.73