Sawtooth Machinery is considering a 4-year project to manufacture a new line ofchainsaws. The project requires an investment of $760,000 and will generate$380,000 per year in earnings before interest, taxes, and depreciation (EBITDA) forthe next four years. The investment will be depreciated straight line to zero overfour 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 cashflows to grow at a constant 3% per year. The tax rate is 35% and the cost of leveredequity is 13%. Sawtooth will borrow 40% of the project value at 6%. Debt will bepaid down as shown in the table below:YearDebt outstanding0304,0001228,0002152,0003476,0000a) What are the unlevered cash flows in years 0 through year 4?

Years 1 to 4:For each of these years, calculate the cash flow using the above formula. Note that…

Answered: Sawtooth Machinery is considering a…

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

See similar textbooks

Similar questions

Management expects a project to generate EBIT of $600,000 per year for 4 years.Depreciation expense is expected to be $225,000 per year and the corporation’s tax rateis 40%. The project will require an increase in net working capital of $50,000 in yearone and allow a decrease in net working capital of $25,000 in year four. The capitalexpenditure for the project will occur in year zero. What is the free cash flow for theproject in year one?
ed Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2,310,000. The fixed asset falls into the three-year MACRS class (MACRS schedule). The project is estimated to generate $1,770,000 in annual sales, with costs of $668,000. The project requires an initial investment in net working capital of $370,000, and the fixed asset will have a market value of $360,000 at the end of the project. a. If the tax rate is 22 percent, what is the project's Year 0 net cash flow? Year 1? Year 2? Year 3? Note: A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to two decimal places, e.g., 32.16. b. If the required return is 12 percent, what is the project's NPV? Note: Do not round intermediate calculations and round your answer to two decimal places, e.g., 32.16. 2,310,000.00 X a. Year 0 cash flow $ Year 1 cash flow $ 1,028,943 06 Year 2 cash flow $ 1,085,454.90 Year…
Your company is considering a project which will require the purchase of $635,000 in new equipment. The company expects to sell the equipment at the end of the project for 25% of its original cost, but some assets will remain in the CCA class. Annual sales from this project are estimated at $224,000. Initial net working capital equal to 28.00% of sales will be required. All of the net working capital will be recovered at the end of the project. The firm requires an 8.00% return on similar investments. The tax rate is 35%, and the project life is 5 years. There are no other operating expenses. Assume the present value of the CCA tax shield is $102,000. What is the project's NPV? Options $126,121 $129,530 $132,939 $136,347 $139,756
Ibuku Property Development Company is refurbishing a 200-unit condominium complex at a cost of $5,250,000. It expects that this will lead to expected annual after tax cash flows of $900,000 for the next ten years. What internal rate of return can the company earn from this project?
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $680,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $90,000 at the end of the project’s 5-year life. The sausage system will save the firm $193,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $45,000. If the tax rate is 25 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.31 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,725,000 in annual sales, with costs of $632,000. The project requires an initial investment in net working capital of $280,000, and the fixed asset will have a market value of $225,000 at the end of the project. a. If the tax rate is 23 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)
Ebay is considering an investment into a project which it intends to operate for 5 years. The project requires an initial outlay of $6 million. The project will generate cash sales of $2.5 million in the first year. Sales will grow by $1 million each year in the following two years. After the third year, sales will grow by 7%. Cash operating costs, excluding depreciation, will be 20% of sales. Depreciation expenses will be 10% of sales. There are no cash flows associated with the salvage value or the net working capital. Ebay’s tax rate is 30%. What is the IRR of this project? (Round to the nearest two digits)
Bhadiben
Amalgamated Industries is considering a 4- year project. The project is expected to generate operating cash flows of $11 million, $14 million, $16 million, and $9 million over the four years, respectively. It will require initial capital expenditures of $41 million dollars and an intitial investment in NWC of $24 million. The firm expects to generate a $11 million after tax salvage value from the sale of equipment when the project ends, and it expects to recover 100% of its nwc investments. Assuming the firm requires a return of 10% for projects of this risk level, what is the project's IRR? Question 3 options: 9.59% 9.22% 8.95% 9.41% 9.69%
Esfandairi Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.35 million. The fixed asset qualifies for 100 percent bonus depreciation in the first year. The project is estimated to generate $1,745,000 in annual sales, with costs of $648,000. The project requires an initial investment in net working capital of $320,000, and the fixed asset will have a market value of $285,000 at the end of the project. a. If the tax rate is 22 percent, what is the project's Year O net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.) a. Year 0 cash flow a. Year 1 cash…
Esfandairi Enterprises is considering a new 3-year expansion project that requires an initial fixed asset investment of $2.37 million. The fixed asset qualifies for 100 percent bonus depreciation. The project is estimated to generate $1,765,000 in annual sales, with costs of $664,000. The project requires an initial investment in net working capital of $360,000, and the fixed asset will have a market value of $345,000 at the end of the project. a. If the tax rate is 21 percent, what is the project’s Year 0 net cash flow? Year 1? Year 2? Year 3? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, e.g., 1,234,567.) b. If the required return is 11 percent, what is the project's NPV? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to two decimal places, e.g., 1,234,567.89.)
Tesla is considering an investment into a project which it intends to operate for 6 years. The project requires an initial outlay of $7 million. The project will generate cash sales of $3.5 million in the first year. Sales will grow by $1.5 million each year in the following two years. After the third year, sales will grow by 8%. Cash operating costs, excluding depreciation, will be 22% of sales. Depreciation expenses will be 11% of sales. There are no cash flows associated with the salvage value or the net working capital. Tesla’s tax rate is 35%. What is the IRR of this project?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

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

SEE MORE TEXTBOOKS