Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. The project will require an investment in net working capital equal to 2% of EBITDA in each of years 1-4. Following year 4, the company expects free cash flows to grow at a constant 3% per year. The tax rate is 35% and the cost of levered equity is 13%. Sawtooth will borrow 40% of the project value at 6%. Debt will be paid down as shown in the table below: Year Debt outstanding 0 304,000 1 228,000 2 152,000 3 4 76,000 0 a) What are the unlevered cash flows in years 0 through year 4?

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
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Sawtooth Machinery is considering a 4-year project to manufacture a new line of
chainsaws. The project requires an investment of $760,000 and will generate
$380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for
the next four years. The investment will be depreciated straight line to zero over
four years. The project will require an investment in net working capital equal to 2%
of EBITDA in each of years 1-4. Following year 4, the company expects free cash
flows to grow at a constant 3% per year. The tax rate is 35% and the cost of levered
equity is 13%. Sawtooth will borrow 40% of the project value at 6%. Debt will be
paid down as shown in the table below:
Year
Debt outstanding
0
304,000
1
228,000
2
152,000
3
4
76,000
0
a) What are the unlevered cash flows in years 0 through year 4?
Transcribed Image Text:Sawtooth Machinery is considering a 4-year project to manufacture a new line of chainsaws. The project requires an investment of $760,000 and will generate $380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) for the next four years. The investment will be depreciated straight line to zero over four years. The project will require an investment in net working capital equal to 2% of EBITDA in each of years 1-4. Following year 4, the company expects free cash flows to grow at a constant 3% per year. The tax rate is 35% and the cost of levered equity is 13%. Sawtooth will borrow 40% of the project value at 6%. Debt will be paid down as shown in the table below: Year Debt outstanding 0 304,000 1 228,000 2 152,000 3 4 76,000 0 a) What are the unlevered cash flows in years 0 through year 4?
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