12. ABC Inc is considering investing in a new project. The project requires a $24 million investment in new equipment. According to IRS rules, the equipment can be fully depreciated straight-line over six years for tax purposes. However, ABC Inc expects to terminate the project at the end of three years and to sell the equipment for $15 million. The new project will also require use of an old machine that ABC already owns. The old machine has a salvage value of $1.5 million and a book value $2 million, both of at t = 0. If the old machine is kept rather than sold, its remaining book value can be depreciated next year (at t = 1). The project is expected to generate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of $15 million per year for three years. (Assume the EBITDA will be received at the end of each year, so at t = 1, 2 and 3.) The project requires an investment in net working capital of $9 million at t = 0. The level of the net working capital will then remain constant for the next two years (ie at t = 1 and t = 2). Then the net working capital will be fully recovered at the end of the project (ie at t = 3). The corporate tax rate is 20% and the cost of capital is 18%. Calculate the free cash flows and the NPV of the project.
12. ABC Inc is considering investing in a new project. The project requires a $24 million investment in new equipment. According to IRS rules, the equipment can be fully depreciated straight-line over six years for tax purposes. However, ABC Inc expects to terminate the project at the end of three years and to sell the equipment for $15 million. The new project will also require use of an old machine that ABC already owns. The old machine has a salvage value of $1.5 million and a book value $2 million, both of at t = 0. If the old machine is kept rather than sold, its remaining book value can be depreciated next year (at t = 1). The project is expected to generate Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) of $15 million per year for three years. (Assume the EBITDA will be received at the end of each year, so at t = 1, 2 and 3.) The project requires an investment in net working capital of $9 million at t = 0. The level of the net working capital will then remain constant for the next two years (ie at t = 1 and t = 2). Then the net working capital will be fully recovered at the end of the project (ie at t = 3). The corporate tax rate is 20% and the cost of capital is 18%. Calculate the free cash flows and the NPV of the project.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:12. ABC Inc is considering investing in a new project. The project requires a $24 million investment
in new equipment. According to IRS rules, the equipment can be fully depreciated straight-line
over six years for tax purposes. However, ABC Inc expects to terminate the project at the end
of three years and to sell the equipment for $15 million.
The new project will also require use of an old machine that ABC already owns. The old
machine has a salvage value of $1.5 million and a book value $2 million, both of at t = 0. If the
old machine is kept rather than sold, its remaining book value can be depreciated next year (at
t = 1).
The project is expected to generate Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA) of $15 million per year for three years. (Assume the EBITDA will be
received at the end of each year, so at t = 1, 2 and 3.)
The project requires an investment in net working capital of $9 million at t = 0. The level of the
net working capital will then remain constant for the next two years (ie at t = 1 and t = 2). Then
the net working capital will be fully recovered at the end of the project (ie at t = 3).
The corporate tax rate is 20% and the cost of capital is 18%.
Calculate the free cash flows and the NPV of the project.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 7 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education